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The State Bank of Pakistan’s (SBP) Monetary Policy Committee (MPC) is scheduled to announce the bi-monthly monetary policy statement on Tuesday (March 17). At present, the policy rate stands at an eight-year high at 13.25% since July 2019. The rate cut, which would be the first after July, is expected to come in the backdrop of a low inflation outlook. The interest rate remains an effective tool with central banks to counter inflation around the world.
A massive over 30% drop in international crude oil prices primarily due to the virus concerns has created a big room for the policy rate reduction. Pakistan’s economy heavily relies on imported energy resources. The share of energy in the total import bill stood at one-fourth in the first seven months of FY20. The drop in global oil prices is estimated to help Pakistan save around $5 billion in the annual import bill.
“We expect inflation to drop to 10% in the ongoing month of March,” remarked Arif Habib Limited Head of Research Samiullah Tariq while talking to The Express Tribune.
Monetary policy: SBP leaves interest rate unchanged at 13.25%
The inflation reading came in at 12.4% in February compared to a nine-year high of 14.6% in January, according to the Pakistan Bureau of Statistics (PBS).
The Express Tribune conducted a brief survey to know what the market players were projecting. All the eight respondents, which included securities and research houses, anticipated a minimum 100-basis-point reduction. Two of them even foresaw a decrease of 200-250 basis points. The contagious virus has badly impacted almost all the major global commodities including palm oil, food, steel, coal, currencies and gold.
“We estimate inflation at 11.4% for the current fiscal year (Jul-Jun 2019-20),” Tariq said.
His full-year inflation forecast is in line with the central bank’s projection of 11-12% for FY20.
BMA Capital Executive Director Saad Hashmi added that the likely rate cut would support domestic businesses and the overall economy in sailing through these tough times.
“The rate cut may not encourage businesses to expand production lines or set up new businesses during these challenging times. However, it will ease the pressure on businesses, especially those running on bank loans.”
The lower interest rate would help businesses to continue to pay off bank loans and survive during the crisis period. It would be positive for the banking industry as well as it would avoid bad and non-performing loans, he said.
In January, the SBP hinted at revising down its projection for the economic growth. Earlier, it estimated the GDP growth at around 3.5% for the current fiscal year. However, the virus has compounded the problems as agricultural and industrial outputs already remain unsatisfactory.
The pandemic is feared to put the global economy into a recession.
China, from where the virus originated in December 2019, has now controlled it in the country. Many countries in Europe, however, are struggling to stop the fast spreading virus. Central banks around the world have cut interest rates in a coordinated effort to support the global economy and avoid its collapse. “This is not a 2008-like financial crisis but experts are comparing the current terrible situation with 9/11,” Hashmi said.
Topline Securities CEO Muhammad Sohail said the rate cut would be in the context of a low inflation outlook. “SBP must also give some other stimulus to the banking industry to overcome the virus-related issues.”
Topline Securities Director Research Atif Zafar said “the SBP can cut more (than 100bps) given the implications of coronavirus.”
Next Capital MD Muzammil Aslam expected a 100-250bps cut. “Economy needs to stay competitive in backdrop of the global decline in interest rates.”
Taurus Securities Head of Research Mustafa Mustansir said in a detailed report that central banks in the US, the UK and Canada cut interest rates by 150bps, 50bps and 100bps respectively in March.
Australia and Malaysia have announced cuts of 25bps each. New Zealand also slashed interest rates by 75bps. Meanwhile, interest rates in the EU and Japan are expected to fall further into negative territory.
“We believe that the impetus for a rate cut is likely to be strong amid the ongoing global monetary easing drive to arrest the economic slowdown caused by the coronavirus,” he said.
Monetary policy: SBP leaves interest rate unchanged at 13.25%
Sherman Securities analyst Saqib Hussain said almost all big economies had slashed the rate to support the global economy. “This can also be the reason for a higher rate cut here as well.”
AKD Securities CEO Farid Alam said “to keep businesses afloat, the policy rate should come down (200bps) to the inflation level. The rupee-dollar exchange rate should be managed. Businessmen had gained confidence at Rs156 to a dollar but it has gone again.”
Aba Ali Habib Securities Head of Research Zubair Jatoi said declining yields of both short and long-term government debt securities indicated a rate cut as inflation would ease further owing to a higher base effect and the recent dip in international oil prices.
Published in The Express Tribune, March 17th, 2020.
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