The week in focus

Analysts change their stance on a revision in the interest rate by the State Bank.

Analysts have changed their stance on a revision in the interest rate by the State Bank, saying the indicators that trigger an increase in the discount rate have not shown any significant upward movement. However, in the long term they see a 50 to 100 basis point increase in the rate before the end of the current fiscal year on June 30, 2011.

The State Bank will announce the bi-monthly monetary policy on September 29, which attracts interest from ordinary citizens and students to analysts and businessmen. In its last policy announcement, the State Bank had unexpectedly increased the discount rate by 50 basis points to 13 per cent.

Head of Equity at BMA Capital, Hammad Aslam, sees no change in the interest rate in the upcoming monetary policy and expects the central bank to wait and see how the situation evolves. “An enhancement in the interest rate can be termed a decision taken in haste.”

Elaborating his point, Aslam said higher fiscal deficit and runaway inflation are the triggers for an increase in the interest rate. But “inflation in Pakistan is imported which has moved higher due to food imports and a rate hike may not restrict it.”

Besides, heavy government borrowing for meeting its expenses and low revenue collection widen the fiscal deficit. “A rise in the interest rate will not deter the government and it will continue to borrow,” Aslam said.

He said the State Bank is not clear about losses to the economy caused by floods and will wait for an assessment before making a decision. The World Bank and the Asian Development Bank are making a damage needs assessment and the outcome is expected by mid-October.

“Discount rate should be lowered instead, but pressure from the International Monetary Fund (IMF) may force the central bank to go for a rise.” However, the analyst predicted a 50 to 100 basis point increase in the discount rate in the current fiscal year.

Impact not visible

Head of Research at InvestCap, Khurram Shehzad, stressed that no concrete results of the previous rate hike have been noticed in the economy and the impact may take some time to be visible. “Economic indicators are mixed and the central bank may wait before making any move.”

He said the monetary policy depends on three indicators which are government borrowing, inflation and current account. First, though the government has continued to borrow but the level has come down in July to mid-September compared to the previous quarter.

Second, core inflation – excluding food and fuel prices - has not been very high and rose 9.8 per cent in August compared to an increase of 12.6 per cent in the same period last year.

Third, current account deficit narrowed 48 per cent to $324 million in August compared to a month earlier because of increase in remittances and inflow of aid money.

Analyst at JS Global Capital, Atif Zafar, sees the possibility of a 50 basis point increase in the interest rate, but says the decision can be delayed. “The results of the previous rate rise are not quite visible, but the IMF pressure is surely there. Besides, overall inflation is also at a high level of 13.23 per cent,” he said.

A treasury bill auction conducted by the State Bank on September 22 indicated a possible rise in the discount rate. In the auction, cut-off yield on six-month bills rose to 12.84 per cent against 12.77 per cent a fortnight ago. Besides, the central bank rejected all bids for the 12-month paper as it did not want to block money of financial institutions for a long period. This suggests an increase in the interest rate if not in the near term but possibly in the medium term.

the writer is incharge Business desk for the Express tribune

Published in The Express Tribune, September 27^th, 2010.