SBP likely to maintain status quo

Small segment expects central bank to raise policy rate by 25-50bps in today’s meeting

KARACHI:

Pakistan’s central bank is scheduled to meet today (Tuesday) to review the happenings in and around the national economy and determine the benchmark interest rate accordingly for the next two months amid the intensifying fourth wave of Covid-19, high inflation reading, rupee depreciation and the IMF programme.

The State Bank of Pakistan’s (SBP) Monetary Policy Committee (MPC) is meeting at a time when the fourth wave of Covid-19 pandemic is gradually worsening in the country.

The infection ratio has reached 23-24% in the port city of Karachi. Other big cities in Punjab are facing a similar situation. Meanwhile, Gwadar, the under-developed city and the future regional port, has been put under complete lockdown for 15 days.

To recall, the central bank slashed the interest rate aggressively by 625 basis points during March-June 2020 to 7% in the wake of Covid-19 outbreak in the country in late February 2020. Since then, the SBP has maintained the rate aimed at supporting businesses, the masses and economic activities at large.

The low interest rate strategy - whereby the inflation-adjusted real interest rate stands at negative 3% - has given the desired result of turning around the economy, which grew 4% in FY21 compared to a negative growth of 0.5% in FY20.

However, the pro-growth and business-friendly policies have resulted in a spike in imports and have mounted pressure on the rupee in recent months. The rupee had touched a nine-month low of Rs162.32 against the US dollar on Friday, but recovered Re1 to Rs161 on Monday.

Besides, the inflation reading surged close to 9% in the preceding fiscal year, which was the upper limit of the central bank’s projection of 7-9% inflation for the year.

Moreover, the government and International Monetary Fund (IMF) have disagreed on a couple of measures to fix the economic issues. The IMF has delayed the sixth review of Pakistan’s economy till September and has withheld the next loan tranche under the $6 billion programme.

The interest rate is a tool available with the central bank to control inflation, do away with the unnecessary rupee movement and give a direction to the national economy.

In this backdrop, the key financial market participants, research houses and pundits largely expect the central bank to leave the benchmark interest rate unchanged in the next bi-monthly monetary policy statement (MPS).

Read More: Foreign exchange: SBP reserves fall $830m to $15.6b

“Our view is that there will be no change in the monetary policy today (July 27). The central bank will leave the benchmark interest rate unchanged at 7%,” Taurus Securities Head of Research Mustafa Mustansir said while talking to The Express Tribune.

“The forthcoming monetary policy will remain accommodative towards economic growth,” Arif Habib Limited Head of Research Tahir Abbas added.

“About 89% of the (62) participants expect no change in the policy rate in the upcoming MPS, compared to 73% in the previous poll (conducted for the previous MPS),” Topline Research reported.

“Seven per cent of the participants expect an increase of 25 basis points … while 4% of the participants anticipate an increase of 50bps. Interestingly, none of the participants expect a cut in the policy rate compared to 12% of participants who expected a reduction in the previous poll.”

Mustansir added that the State Bank had extensively emphasised in its recent monetary policy announcements that it would not increase the interest rate till the time demand-side pressure emerged in the economy.

“At present, there is no such indication that there is demand-side pressure,” he maintained.

The economy is still in the recovery mode. “The central bank will increase the interest rate once the growth in the economy is believed to be becoming sustainable. The SBP will adjust the rate upwards gradually,” he said.

"In the worst case scenario, the State Bank may increase the interest rate by 25 basis points. They may give an explanation that they are foreseeing the build-up of demand-side pressure in the near future … and want to control the unnecessary devaluation of the rupee."

However, "there are only 5% chances the SBP will increase the interest rate," the analyst added.

Endorsing his views, Abbas said that any increase in the interest rate would be tantamount to hurting the economic growth. "Therefore, it will keep the rate unchanged to continue its accommodative policy."

Pakistan is not alone in facing a high inflation reading. It is a global phenomenon. Shortfall in production of food items and a hike in international petroleum prices have given a tough time to many economies amid the pandemic.

Secondly, the IMF understands the evolving situation in Pakistan and around the world. It has remained supportive under the Covid-19 pandemic.

"It will not put pressure on Pakistan government to take required measures until the economy recovers to pre-pandemic levels."

Experts, however, anticipated an increase of up to 50 basis points in the remaining bi-monthly monetary policy statements till December 2021.

Published in The Express Tribune, July 27^th, 2021.

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