Market analysts expect interest rate to remain unchanged

Central bank is due to announce monetary policy statement today

KARACHI: The State Bank of Pakistan (SBP) is strongly expected to leave the benchmark interest rate unchanged at an eight-year high of 13.25% today (Tuesday) to put the brakes on accelerating inflation emanating from recent hike in prices of power, gas and foods in the country.

Pakistan is expected to encounter nine-year high inflation over 13.5% in the ongoing month of January 2020, according to several research houses. The interest rate remains an effective tool with the central bank to contain inflation.

The Express Tribune conducted a brief market survey and asked analysts about their expectations for revision in the policy rate for the next two months. All the six respondents - brokerage and research houses - projected that the central bank would leave the interest rate unchanged for the next two months.

In another similar survey conducted by IMS Sales & Bloomberg on November 22, 2019 for the interest rate to be accounted today (Jan 28), all such 29 respondents anticipated status quo in the rate.

The central bank was of the view in the previous monetary policy statement issued in November 2019 that the soaring inflation was a short-term phenomenon. It was on the rise partly due to temporary disruption in supplies of foods from fields to end-consumers. The central bank has left the interest rate unchanged since July 2019.

Some of the research house still found the inflation as a short-term phenomenon. They expected the inflation to remain well under the central bank projected limits of 11-12% in the full current fiscal year 2019-20. “We believe surge in inflation is due to supply disruptions of key commodities and this might settle down in the coming months. We expect inflation to start declining from March 2020 to 11.5% due to high base effect. After considering forecasted inflation, we expect rate cuts to begin from March 2020,” Arif Habib Limited Head of Research Samiullah Tariq told The Express Tribune.

Although no one expected uptick or downtick in interest rate in their official responses; however, a couple of analysts did not rule out a slight change in the rate in their individual capacities.

The central bank may slightly increase the rate as inflation has continued to surge on a month-on-month basis, they said, SBP may slightly cut the rate to let economic activities step up, as the economy had slowed down beyond expectations due to prevailing high interest rate and prior massive depreciation in the rupee against the US dollar.

Islamabad is bound to perform in line with its tough commitments made with the International Monetary Fund’s (IMF) to acquire the latest loan programme worth $6 billion acquired to fix the faltering economy in May 2019.

BMA Research Executive Director Saad Hashmi said, “We expect status quo in tomorrow’s (Tuesday) monetary policy announcement. Inflation is still rising. As long as inflation remains on an upward trend, SBP is unlikely to adopt an easing stance.”

Sherman Securities Research Analyst Saqib Hussain said, “We expect SBP policy rate to remain unchanged due to negative real interest rate (the benchmark interest rate minus inflation)…But the government will stick to monetary status quo as inflation may reduce going forward.”

JS Global Director Research Syed Atif Zafar said, “No change, as the government has been unable to arrest food inflation. Inflation for Jan is expected at 13.5%.”

Taurus Securities Deputy Head of Research Mustafa Mustansir said, “We expect the NCPI (national consumer price index) to peak during February-March 2020 on the back of expected surge in utility prices, in particular as gas price hikes go in to effect. Consequently, given a narrowing real-interest rate corridor coupled with forward looking inflationary pressures, we expect the benchmark policy rate to remain unchanged.”

Aba Ali Habib Head of Research Zubair Jatoi said, “Our expectation of status quo is based on upward trend in inflation, we expect inflation to rise to 13.68% in January which is largely in line with SBP’s expectation of 11%-12%...for FY20.”

Published in The Express Tribune, January 28^th, 2020.

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