It appears to be the proverbial ‘one step forward, two steps back’ situation for the banking sector of Pakistan.
First the central bank kept squeezing the banks’ spreads by lowering the discount rate. Then it changed the methodology to calculate the minimum deposit rate, which limited the gains the banking sector was set to have in the wake of monetary tightening in the economy.
And finally, the latest inflation numbers released by the Pakistan Bureau of Statistics remained below expectations, giving rise to the view that the discount rate will remain flat in the next monetary policy announcement due later this month.
Speaking to The Express Tribune, Alternate Research investment analyst Umesh Kumar said his house has revisited its monetary policy estimates in view of the latest Consumer Price Index (CPI) figures. “We believe the discount rate will be kept flat at 10% in the upcoming monetary policy announcement,” he said, noting that the impact of the proposed increase in gas prices will take effect with a usual time lag.
According to AKD Securities, the State Bank of Pakistan (SBP) will likely maintain the status quo in the upcoming monetary policy given the recent appreciation in the rupee-dollar parity and the lower-than-expected CPI for December.
Similarly, both KASB Securities and Global Securities believe that the case for a discount rate hike in January’s announcement is now weak with CPI numbers surprisingly on the downside coupled with recent strength in the rupee.
“The interest rate outlook will depend on the inflation numbers, as the SBP will try to keep real interest rates in the positive territory,” according to Global Securities.
There was almost a consensus among analysts that the discount rate would see an uptake in January. But their view changed when inflation for the month of December clocked up at 9.18% against 10.91% recorded in the preceding month.
On a month-on-month basis, inflation decreased 1.32% because of a significant decline in the perishable food items category and a lower-than-expected increase in the non-perishable food items category. According to BMA Capital Management, a hike in the prices of food items is not expected in the wake of the continued winter season in January.
Though bad for the banking sector, the status quo on the monetary policy front will leave a positive impact on the leveraged sectors of the economy, such as fertilisers. “This will bode negative for the banking sector that has been rallying on the back of the expectation about an increase in the discount rate in January,” said a research note by BMA Capital Management.
Published in The Express Tribune, January 6th, 2014.