Monetary policy: Analysts predict no change in discount rate

Government focus will mainly be on building reserves initially.

KARACHI:

Modifying their nearly unanimous view about the upcoming monetary policy announcement, an overwhelming majority of analysts polled by The Express Tribune on Wednesday said they expect the State Bank of Pakistan (SBP) to keep the discount rate unchanged for now.

The discount rate, due on September 13, is the interest rate at which commercial banks are allowed to borrow from the central bank’s discount window. After decreasing by as much as 300 basis points since 2012, the discount rate currently stands at 9%.

Most analysts that The Express Tribune spoke to in the latter half of August had predicted an upward revision of 50 to 100 basis points in the discount rate.

“We were expecting a hike in the interest rate, but new developments on the International Monetary Fund’s (IMF) front indicate the status quo will be maintained,” Shajar Capital Head of Research, Nauman Khan, said while speaking to The Express Tribune.

However, the Letter of Intent (LoI) that the Ministry of Finance submitted to the IMF - and subsequently released to the media on September 5 - hinted that the central bank would pursue a “moderate monetary policy” while avoiding policy tightening for at least the first year of the 36-month IMF programme.

“Inflation will initially increase, due in part to some weakening of the rupee as reserves are rebuilt. However, monetary policy will likely be tightened in later years to help bring inflation down to the 6%-7% range by the end of the programme period,” the LoI stated.

After the release of the LoI, Shajar Capital estimates the current monetary policy rate will stay unchanged until August 2014.

Speaking to The Express Tribune, NBP Fullerton Asset Management CEO, Dr Amjad Waheed, said the State Bank is likely to maintain the monetary policy rate in the upcoming policy announcement. “However, I believe the interest rate should be increased in view of rising inflation numbers in recent months,” he said. The Consumer Price Index (CPI) was 8.5% in August as opposed to 8.2% in July.

“I believe that keeping a low monetary policy rate while inflation is increasing results in the dollarisation of the economy and flight of capital from the country,” Waheed said. He added that inflation numbers are going to go up even further, as the effects of a hike in fuel and electricity prices kick in.

Showing the unanimity of opinion with regard to the upcoming monetary policy, banks did not submit any bids at the latest auction of market treasury bills of six- and twelve-month tenors held on September 4.

Analysts attributed the banks’ lack of interest in market treasury bills of longer tenors to expectations of the central bank increasing the discount rate in the upcoming policy rate announcement.

According to Global Securities Research Analyst Umair Naseer, the SBP will stick with the 9% monetary policy rate for now, although the brokerage house had earlier warned its client about the impending monetary tightening process.

“CPI is expected to remain in the range of 8.6%-8.9% in the next two months. Hence, we expect the SBP to tighten its monetary stance from November onwards,” Naseer said.

Published in The Express Tribune, September 12^th,  2013.

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