Forecast: Central bank likely to keep discount rate on hold

Brokerage houses foresee no change in monetary policy stance.

Kazim Alam May 06, 2014
The monetary policy rate is the interest rate at which commercial banks are allowed to borrow from the central bank’s discount window. PHOTO: FILE


A majority of brokerages expects the State Bank of Pakistan (SBP) to keep the discount rate unchanged in the monetary policy announcement due this month.

Announced every two months, the monetary policy rate is the interest rate at which commercial banks are allowed to borrow from the central bank’s discount window.

The central bank uses this tool to control inflation by changing the level of money supply in the economy. Currently, the monetary policy rate stands at 10%.

“We still foresee an unchanged stance on the discount rate despite twittering (sic) by the resident International Monetary Fund (IMF) representative of increasing it,” Standard Capital Securities Research Analyst Rajesh Kumar Maheshwari said in a note issued to clients on Tuesday.

He was referring to a recent tweet by the Resident Representative Office of the IMF in Islamabad in which the international lender said the “SBP monetary policy needs to respond” to the increased inflation numbers recorded last month.

The Consumer Price Index (CPI) for April was 9.18% on a year-on-year basis as opposed to 8.53% in the preceding month. It was higher than the estimate of most analysts, as prices of perishable food items surged 18.15% on a monthly basis, thus increasing the overall CPI.

Later on, the IMF clarified that it did not call for the SBP to jack up interest rate, adding the central bank should respond to higher inflation through either increased open market operations or a modest rate change.

Predicting the status quo on the monetary policy front, Elixir Securities said the discount rate of 10% will still lead to a positive real interest rate – the difference between inflation and the monetary policy rate – of 82 basis points.

Elixir Securities forecasts that average inflation for 2013-14 will be 8.75% year-on-year as opposed to the average inflation of 7.36% for 2012-13, up 129 basis points on a yearly basis.

According to BMA Capital, the SBP is likely to keep the discount rate at the current level. It will help the banking sector and hurt leveraged sectors, such as textile, fertiliser and cement, it said in an email sent to its clients on Tuesday.

Similarly, both Global Securities and Invest Capital anticipate the status quo to prevail in the upcoming monetary policy announcement, whose date is yet to be announced.

“Next two months are expected to be the major consideration for the settlement of the discount rate, as average CPI for 2013-14 is likely to settle around 9%,” said Invest Capital Research Analyst Abdul Azeem, adding the rest of the fiscal year is likely to post higher inflation due to Ramazan, Eid and the annual budget announcement.

Given that the real interest rate will still be about 100 basis points, he said his brokerage does not foresee any discount rate cut in the upcoming announcement.

The only brokerage so far that anticipates a rate cut of 50 basis points is Foundation Securities. Its expectation of monetary easing in the near future is based on the fact that the rise in CPI is mainly attributed to two heads -- perishable food items and education – while the broader trend in prices is still under control.

Moreover, it says that despite the CPI figure in April, inflation outlook is still benign with the index expected to hover around 7-8% in the first quarter of the next fiscal year.

Published in The Express Tribune, May 7th, 2014.

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