SBP may leave rate unchanged
Pakistan’s central bank is scheduled to decide on Monday (today) whether to leave the key policy rate unchanged at the current level of 7% or revise it upwards or downwards to rebalance the economy in the current challenging times under Covid-19.
The State Bank of Pakistan’s (SBP) monetary policy committee is meeting at a time when fresh Covid-19 infection cases are again on the rise in the country.
Earlier, the Covid-19-induced lockdown in the country and across the globe prompted the central bank to cut the policy rate by a significant 625 basis points in a period of four months from March to June 2020. The policy rate currently stands at 7%.
However, the International Monetary Fund’s (IMF) ongoing loan programme has been put on hold ahead of increase in electricity and gas tariffs.
At the same time, the country’s foreign income is shrinking gradually while its expenditures are growing with Prime Minister Imran Khan considering announcing a second relief package for households and businesses to help them cope with Covid-19.
On the flip side, the average inflation reading shrank to 8.74% in the first two months (Jul-Aug) of current fiscal year, which was in line with the central bank’s projection of 7-9% inflation for FY21.
Experts say inflation rate may recede further in the coming months largely because of sluggish demand for commodities other than the essential ones (like food items) and likely stability in prices of petroleum products in the international market in the short to medium term.
Pakistan counts heavily on import of energy products. Experts, however, do not rule out an increase in inflation if the government opts to jack up energy prices to undo the pause in the IMF loan programme of $6 billion.
The central bank adjusts its policy rate according to the inflationary trend. A high inflation reading demands an increase in the policy rate to make borrowing expensive and low inflation leads to a reduction in the policy rate to stimulate business expansion.
The rate revision also impacts other economic indicators as well as gross domestic product (GDP) growth.
At present, real interest rate (interest rate minus inflation) stands at around zero, or negative, in Pakistan. In this backdrop, a large number of participants in the economy like banks, textile, fertiliser, cement and steel manufacturers expect the SBP to leave the benchmark rate unchanged.
“Some 83% of total respondents are of the view that the SBP will keep the policy rate unchanged; 17% see a rate cut … in the range of 25 to 100 basis points while nobody expects a rate hike this time around,” Arif Habib Limited (AHL) said while citing results of its market survey on the forthcoming monetary policy statement.
Topline Research reported, “Out of 87 responses received, 72% (or 63 respondents) are of the view that the rate will stay unchanged while 20% (or 18 respondents) vote for a rate cut of between 25 and 100 basis points. The remaining 7% have voted for a rate hike in the range of 25 to 100 basis points.”
“The SBP in its publication ‘The State of Pakistan’s Economy’ emphasises that it would take whatever measures it considers necessary in response to Covid-19-driven economic developments until it is confident that the economy has weathered recent events,” AHL analyst Sana Tawfik said in a report.
Earlier, the central bank decided not to hold a regular bi-monthly monetary policy meeting scheduled for July 2020 as it felt no need to review the measures and economy at that time after aggressively cutting the policy rate by a total of 625 basis points in five emergency and scheduled meetings in four months – from March to June.
AHL Head of Research Tahir Abbas said the other day the cancellation of the meeting indicated “the policy rate has bottomed out at 7%”.
“We believe the negative real rate is here to stay and a reversal in policy may not come till February 2021. Rate reversal will only begin if the global Covid-19 position improves, Pakistan’s current account deficit starts showing signs of improvement or inflation hits double digit,” Alfalah CLSA’s analyst Fahad Irfan said.
Tawfik added the inflation reading had remained range bound at 8-9% in recent months compared to double-digit readings of 10-15% between September 2019 and March 2020.
“However, a key threat to inflation is the upward revision, if any, in electricity and gas tariffs – which is the main reason for Pakistan and the IMF being at loggerheads in the ongoing negotiations under the loan programme,” she said.
“Also, the recent flooding amid monsoon season will keep overall food prices under pressure. If Pakistan agrees on an upward revision in tariffs, then inflation will see an uptick.”
For now, the monetary easing is aimed at ramping up aggregate demand, which still remains subdued due to Covid-19. However, the SBP expects a gradual recovery in FY21, powered by easing lockdowns, supportive macroeconomic policies and a pickup in global growth, as stated in the monetary policy statement of June 2020, according to Tawfiq.
“Stable cut-off yields in recent auctions of government securities ie treasury bills and Pakistan Investment Bonds (PIBs) also point towards status quo (in the monetary policy),” Taurus Securities’ Head of Research Mustafa Mustansir said in a report.
Secondary market yields since June 2020 have averaged around 6.84% (for three-month T-bills) and 7.92% (for three-year PIBs).
Irfan added that a stable current account would act as a force behind maintaining the status quo. The current account deficit had been consistently declining over the past two years. In terms of GDP, the deficit stood at 1.1% in FY20 compared to 4.8% in FY19, he said.
“Move to a flexible exchange rate regime, low crude oil prices and general economic slowdown are the main reasons behind the improvement,” Irfan said.
“Recently, we have also seen a sharp increase in workers’ remittances (up 36.5% in July 2020), however, we believe this is a temporary phenomenon and remittance flow through official channels will slow down once international travel picks up pace and carrying of cash resumes.”
The writer is a staff correspondent
Published in The Express Tribune, September 21st, 2020
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