SBP may leave rate unchanged

Experts believe policy rate hiking cycle has come to an end

KARACHI:

Pakistan’s central bank is scheduled to meet on Monday to review its key policy rate for the next six weeks. Experts strongly believe the bank will keep the rate unchanged for the third time in a row in the past four months to push inflation down.

Experts have developed consensus that the rate hiking cycle has come to an end at the record high of 22%. They, however, were divided over the timing of rate cut in the coming months – between December 2023 and March 2024 – amid high inflation and the Middle East crisis.

Inflation hit a four-month high at 31.4% in September 2023 in line with the State Bank of Pakistan’s (SBP) projection.

Pak-Kuwait Investment Company Head of Research Samiullah Tariq said “no change” was expected in the central bank’s policy rate on Monday as inflation remained under control. He held the firm view that the SBP would not increase the rate as inflation was expected to come down in October. But it is not “the right time to cut the rate”.

“Pakistan’s economy is expected to stabilise with easing inflation in the next three months,” Tariq said, adding that the central bank would make the first rate cut in March 2024.

Read RMB to facilitate trade with China: SBP

Arif Habib Limited Head of Research Tahir Abbas said they foresaw “status quo” in the policy rate ahead of the first International Monetary Fund (IMF) review under its $3 billion loan programme scheduled for next week.

“The central bank is unlikely to cut the policy rate to avoid having an impact on the IMF review,” he said. Fundamentally, he added, the expected reduction in inflation was yet to be reported that held the key to any policy rate decline.

He believes the real interest rate (policy rate minus inflation) on a 12-month forward-looking basis has turned positive, considering the monthly inflation will decelerate to 15% by the end of June 2024.

He projected that the central bank would make the first token rate cut in December to give a new direction to the monetary policy. “Actual monetary policy easing will start from February and March, when inflation will come down significantly.”

Inflation forecasts suggested that the central bank may reduce the policy rate by 4-5 percentage points by the end of June 2024 when year-on-year inflation may recede to 15%, Abbas said.

Chase Securities Director Research Yousuf M Farooq also saw no change in the policy rate in the upcoming review.

He doubted that the bank may make a token rate cut in the range of 25-50 basis points on Monday, considering the real interest rate on a 12-month forward-looking basis stood positive. “This will also set future direction of the monetary policy.”

He said the smart 10% recovery in the rupee-dollar exchange rate to around Rs280/$ and the muted current account deficit for the first three months of FY24 also supported the policy rate cut going forward. Topline Research analyst Sunny Kumar said in a commentary they conducted a poll of key market participants about their policy rate expectations.

According to the survey, “70% of participants expect policy rate to remain unchanged at 22%.” However, 16% expect the rate to come down by 25-100 basis points and 11% saw a reduction of more than 100 basis points. The remaining 3% expect the rate to go up by more than 100 basis points.

“In the last MPC meeting held on September 14, 2023, the central bank … decided to keep the policy rate unchanged at 22%, which was contrary to market expectations,” he said.

Since that monetary policy committee (MPC) meeting, new developments have taken place, which will likely be considered by the committee in the upcoming meeting. These include current account deficit of $8 million in September 2023 versus $164 million in August 2023, average decline of 11% in local fuel (petrol and diesel) prices, stable international oil prices at around $90 per barrel and rupee appreciation by 7% against the US dollar, he said.

Published in The Express Tribune, October 29^th, 2023.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.