Analysts expect SBP to keep rate unchanged

Anticipation comes due to lower-than-expected inflation reading for Aug


Salman Siddiqui September 14, 2019
Anticipation comes due to lower-than-expected inflation reading for Aug. PHOTO: FILE

KARACHI: Though the key interest rate has skyrocketed in Pakistan, the latest inflation reading is lower than expected and the current account deficit has also narrowed.

With these desired developments and following criticism of the interest rate hike to an eight-year high at 13.25% in July, the central bank will discuss on Monday (September 16) whether to raise, cut or keep unchanged the interest rate.

It is pertinent to mention that the high interest rate has sparked an economic slowdown in the country.

The Express Tribune conducted a brief survey on the possible decision to be taken by the State Bank of Pakistan (SBP) Monetary Policy Committee.

Eight research houses, out of the total nine surveyed, strongly expected the status quo to be maintained in the bimonthly monetary policy statement to be released on Monday. However, one leading research house anticipated a 25-basis-point (bps) cut to 13%.

Inflation was recorded at 10.5% compared to expectation of over 11% in August 2019.

The drop came after the Pakistan Bureau of Statistics (PBS) changed the base year for measuring inflation to 2015-16 from 2007-08 previously "to better incorporate the changing patterns of consumption of Pakistan's population."

Similarly, the current account deficit contracted 73% to $579 million in July 2019 compared to $2.13 billion in July 2018.

Earlier, the deficit consumed the country's foreign currency reserves and caused a massive 52% depreciation of the local currency since December 2017 to Rs160.05 against the US dollar by June 30, 2019.

Alpha Beta Core CEO Khurram Schehzad expected the status quo to be maintained in the monetary policy statement.

"Inflation has slowed down a bit. Staring this fiscal year, the external account deficit has narrowed down and currency parity has stabilised. So further tightening is not on the cards," he said.

Sherman Securities senior analyst Chandar Kumar said at the current inflation rate of 10.5%, the real interest rate stood at 2.75%, which was in line with the historical average real interest rate.

"We believe the SBP may closely watch a few more CPI (Consumer Price Index) readings before slashing the interest rate just to strengthen its view that inflation has peaked out."

Elixir Securities' Director Investment Banking Hamad Aslam said while the ongoing economic slowdown required an aggressive easing on the monetary front, "we believe the central bank will have no choice but to closely follow IMF's (International Monetary Fund) recipe."

He strongly believed that the interest rate in Pakistan would have a very limited impact on inflation - and in fact was quite detrimental to the government itself as it resulted in a higher fiscal deficit. He was of the view that the higher interest rate in Pakistan indirectly sparked inflation.

"However, the IMF believes otherwise. Coupled with the central bank's aim to attract portfolio inflows into the debt market, we expect the MPC (Monetary Policy Committee) to keep the interest rate unchanged," he said.

Topline Securities CEO Muhammad Sohail anticipated no change in interest rate in the policy statement. "Inflationary expectations may continue with the risk of new taxes. Though foreign exchange reserves are stable now, they are still less than adequate levels," he said.

Next Capital Managing Director Muzammil Aslam said economic slowdown and a sharp decline in the current account deficit would prompt the Monetary Policy Committee to keep the interest rate unchanged at 13.25% for the next two months.

JS Global Head of Research Hussain Haider said in a detailed report that considering the lower inflationary reading under the new base and the unfolding global scenario, "we believe that monetary easing is imminent. The question that remains is its timing."

"In our view, given the conditions on the fiscal side, the State Bank may opt to maintain the status quo, at least in the current calendar year, given the absence of a clear policy to finance the fiscal deficit," he said.

 

25bps cut?

Arif Habib Limited expected a 25-basis-point cut in the interest rate to 13%. "Primary reason for this (expected) decline in the policy rate, in our view, is the decline in FY20 expected inflation from 10.7% to 9.6% due to the rebasing of CPI from 2007-08 to 2015-16," it said.

Data for the past 48 months exhibited that the average real interest rate has remained approximately 2.1%. "Therefore, we believe a rate cut of 25bps in the upcoming monetary policy, which will still keep the real interest rate at 3.08%."

To recall, the previous rate hike of 100 basis points in July 2019 was on account of higher inflationary forecast and one-time adjustment in utility prices. "Despite the adjustment in utility prices, the change in weightage of gas and electricity in the CPI methodology resulted in lower inflation for the previous and current years," it said.

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