Discount rate expected to stay the same at 12.5 per cent

35 fund managers were surveyed to see what changes they expected in the interest rate in the next bimonthly policy.

KARACHI: Thirty-five fund managers were surveyed to see what changes they expected in the interest rate in the next bimonthly monetary policy. With the policy to be announced on July 30, KASB Securities set out to take this survey.

Their recent rounds of meetings with international investors in the Far East had indicated that the reintroduction of leverage in an otherwise cash only market and the potential easing of monetary policy at a time when regional peers look to withdraw stimulus, were key to increasing the stock market’s earnings. The stock market is currently earning only 40 per cent of what its regional peers are making, according to KASB securities analysts.

Expectations largely favour the status quo being maintained; 93 per cent of those surveyed expected that the discount rate would be maintained at 12.5 per cent. However views on the expected discount rate by December 2010 diverge; 34 per cent of the fund managers expect an increase, 52 per cent see it remaining the same and 14 per cent expect a decrease.

The recent treasury bill and the Pakistan Investment Bond auctions together with the results of the survey show that the risk of a policy rate increase is present.

KASB Securities analyst, Hamza Marath, remains optimistic about medium-term inflation and sovereign flows. He does not expect the State Bank to raise the discount rate unless the situation; fiscal pressures and capacity constraints, spiral out of hand.

The central bank is
expected to wait for details

The 93 per cent of the surveyed expect the discount rate will remain unchanged at 12.5 per cent because they believe that the central bank will be reluctant to change the discount rate before a clearer picture of the economic situation emerges.

The central bank should have a decent idea about the fiscal accounts for the fiscal year of 2010 after estimated targets for the fiscal year 2011 are finalised and the expected negotiations between IMF and Pakistan’s economic team in late August. And they also have to get an idea of the progress on the latest support commitments by the US during the recently concluded visit of Hillary Clinton.

Due to this, the upcoming monetary policy is likely to be a non-event for the KSE where sentiments are likely to remain pegged to progress on leverage product, the concept paper for which will come up for approval discussion around the same dates as the monetary policy.

Published in The Express Tribune, July 24^th, 2010.