Expectation: No change in monetary policy rate, predict analysts

Interest rate ‘well above the SBP comfort level’.

KARACHI: Majority of analysts polled by The Express Tribune expect the State Bank of Pakistan (SBP) to keep the discount rate unchanged in the next monetary policy announcement due next week.

The monetary policy rate, which is announced every two months, 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 do not expect the central bank to change the monetary policy rate in the upcoming policy announcement,” Foundation Securities Research Analyst Mohammad Fawad Khan told The Express Tribune on Wednesday.

Saad Khan of Arif Habib Limited also expects the discount rate to stay at 10% in the next announcement. He bases his opinion on the fact that the real interest rate – which is the difference between inflation and the key interest rate – is ‘well above the SBP comfort level’.

“We base this on two factors: one, normalising inflation and stable outlook in 2014-15, and two, sustainable external accounts outlook,” he noted. The only factor that may dampen the expectation of the status quo on the monetary policy front going forward, Khan says, is any substantial rise in energy prices resulting in an increased general price level in the economy.

Citing the latest inflation figures that reflect a real interest rate of 178 basis points for June, and 138 basis points for 2013-14, Elixir Securities also projects the discount rate to remain flat at 10% for the next two months.

Last month, the Consumer Price Index (CPI) clocked up at 8.2% on a year-on-year basis, which was below the market expectation of 8.6%. The reason for the less-than-expected CPI for June, according to Elixir Securities, was that the price increase pertaining to food and non-alcoholic beverages groups remained under control. Similarly, core inflation data was also encouraging, as non-food, non-energy inflation remained 8.7%, up 40 basis points from the preceding month.

According to KASB Securities, the central bank will likely wait for a sustained decline in CPI, which has been volatile in recent months. “We expect no change in the discount rate… Real interest rates have remained in the positive zone since December 2013 in the range of 0.8%-2.1% with no sustained trend,” it said.

Earlier, the SBP was going to announce the next monetary policy on July 12. But a statement issued by the central bank on Wednesday said the policy will now be announced on July 19.

Published in The Express Tribune, July 10^th, 2014.

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