Market sees no change in policy rate
A Reuters file image of SBP logo
Pakistan’s central bank is scheduled to meet on Tuesday to announce the key policy rate for the next six weeks to maintain balance between inflation reading and economic growth.
In late January 2022, the State Bank of Pakistan (SBP) hinted at maintaining the status quo in policy rate at 9.75% (from March onwards).
At that time, the rate was enough to gradually tame inflation that came in at 13% in January 2022 and to support the economic growth target of 4.5% in the current fiscal year. If rate hike would be necessary, it would be gradual and moderate, the SBP said.
In this backdrop, and despite the emergence of new challenges in the national economy, a large section of financial experts and market participants expected the central bank to keep the interest rate unchanged for the next six weeks.
A section of pundits, however, did not rule out an upward revision in the wake of a sharp increase in international oil prices to a 14-year high of nearly $130 per barrel on Monday compared to around $70 a year ago.
The high oil prices would not only increase the country’s import bill, trade deficit and current account deficit but will also lift inflation, though the government has fixed petroleum product prices till the end of June 2022.
The spike in global commodities’ prices, such as oil, seemed short-lived and temporary. Therefore, “the central bank will adopt a wait and see strategy and leave the key policy rate unchanged on Tuesday,” Arif Habib Limited (AHL) Head of Research Tahir Abbas said while talking to The Express Tribune.
“If the global crisis prolongs and forces the central bank to hike the rate, then the SBP can increase the benchmark policy rate in the next monetary policy meeting which is due next month (April 19, 2022).”
Pak-Kuwait Investment Company Head of Research Samiullah Tariq, however, anticipated that the central bank would increase the interest rate by 50 basis points to 10.25%.
“Global inflation is expected to remain high and impact Pakistan’s economy as well. To counter negativity, the central bank will increase the benchmark interest rate,” he said.
Though the commodity prices have increased sharply, “keeping in view the SBP’s focus to sustain economic recovery and its last forward-looking guidance, we anticipate no change in the upcoming MPS (monetary policy statement),” Topline Research analyst Umair Naseer said in a commentary.
The decision not to increase petroleum prices till June 2022 may also provide some cushion to the inflation outlook, he said.
Keeping in view the latest developments, the SBP may also revise its forecast for the current account deficit (projected at 4% of GDP in FY22) and inflation (9-11% for FY22).
“Moreover, we expect some changes in the forward guidance (uptick in the policy rate in the next MPS) considering the rising commodity prices and other recent developments,” he said.
Ismail Iqbal Securities Head of Research Fahad Rauf said the Russia-Ukraine situation had completely changed the commodity landscape, with crude oil up 50%, coal up 140% and wheat up 57% since the last MPC meeting.
Secondary market yields had dropped following the release of last monetary policy, announced in January, but they climbed back up, and including today’s (March 7) movement, they would be roughly at the same levels as they were before the January announcement.
The impact on inflation would also be visible but limited to some extent due to government’s recent measure to fix energy prices for the next four months, albeit this would have fiscal consequences (government estimated Rs250-300 billion but it could be much higher considering rise in oil prices).
However, SBP might not pay too much attention to these measures as IMF (International Monetary Fund), in a recent statement, called for fiscal policies to support vulnerable households. IMF also says that monetary authorities will need to carefully monitor the spillover impact of rising international prices on domestic inflation, to calibrate appropriate responses. IMF has also hinted at financial support for member countries, he said.
Published in The Express Tribune, March 8th, 2022.
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