Monetary policy: Analysts expect downward revision of interest rate

Rupee appreciation, improving inflation figures to be taken into consideration.


Our Correspondent March 14, 2014
After increasing the rate by 100 basis points in the first half of the fiscal year, the SBP had left it unchanged at 10% in the last announcement in January. PHOTO: FILE

KARACHI:


Strong appreciation in the value of the rupee against the dollar, coupled with a slowdown in inflation during the last three months, is likely to result in the State Bank of Pakistan (SBP) lowering the key interest in the next monetary policy due on Saturday.


A majority of analysts believes the central bank will slash the monetary policy rate by 50 basis points to 9.5%.

The monetary policy rate is the rate at which commercial banks are allowed to borrow from the central bank’s discount window. The central bank uses this tool to control money supply in the economy.

After increasing the rate by 100 basis points in the first half of the fiscal year, the SBP had left it unchanged at 10% in the last announcement in January.

According to Global Securities Research Analyst Umair Naseer, his brokerage house expects a cut of 0.5% in the policy rate because of an improved inflation outlook and sharp rupee appreciation against the dollar. Inflation numbers have been encouraging for the last three months, as the Consumer Price Index (CPI) decreased from double digits (10.9%) in November to 9.2% in December, 7.91% in January and 7.93% in February.

“A lower inflation number kept the real interest rates to 207 basis points (2.07%) in February. This will give the SBP room to soften its policy stance to encourage growth in the economy. The SBP has historically maintained a 150-200 basis points differential between the discount rate and inflation,” Naseer said, adding the rupee has also appreciated 7% since January, thus building a strong case for a rate cut.

Invest Capital Research Analyst Abdul Azeem believes the CPI will come down by 40-50 basis points in case the government passes on the impact of the rupee appreciation by easing off fuel prices. It means the CPI for April and May will be settled around 7.3%, he said, thus leaving the real interest rate at 2.7%. “This scenario allows cushion for a discount rate cut by 50 basis points to 9.5% in the upcoming policy statement,” he said.

AKD Securities’ Anum Dhedhi also believes the SBP may cut the discount rate by 50 basis points to 9.5%. She goes on to recommend that investors should consider offloading shares in the banking sector while building positions in leveraged sectors, such as cements and fertilisers.

However, the brokerage industry is not unanimous in its expectation of a decrease in the monetary policy rate. For example, Arif Habib Limited believes the SBP will keep the rate unchanged at 10% because the recent improvements in macros – declining inflation, stabilising current account balance, stronger rupee, increasing private-sector credit off-take --  are still in their ‘too early to act’ phase.

Published in The Express Tribune, March 15th, 2015.

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