Monetary policy: A cut of 50 basis points expected, say most analysts
Lower-than-expected inflation prompts anticipation
After keeping it flat at 10% from November 2013 to November 2014, the SBP reduced the discount rate by 50 basis points to 9.5% in its last monetary policy announcement. PHOTO: FILE
KARACHI:
With most economic indicators justifying monetary easing in the next policy announcement, a majority of analysts expect the State Bank of Pakistan (SBP) to reduce the discount rate by at least 50 basis points.
SBP Governor Ashraf Mahmood Wathra will read the monetary policy statement at a press conference on January 24, according to the central bank’s spokesperson. The discount rate is the principal monetary policy tool that the central bank uses to control money supply in the economy.
After keeping it flat at 10% from November 2013 to November 2014, the SBP decreased the discount rate by 50 basis points to 9.5% at its last monetary policy announcement.
Reviewed every two months, it is the interest rate at which commercial banks are allowed to borrow from the central bank’s discount window on an overnight basis.
The Consumer Price Index (CPI) inflation clocked up at just above 6% during the first half of 2014-15, which is significantly lower than the CPI of 8.9% for the same six months of the preceding fiscal year.
Lower-than-expected inflation coupled with expectations of subdued CPI in the future typically prompt the central bank to opt for monetary easing. By making the availability of credit cheaper by means of an interest rate cut, the SBP helps businesses expand and grow the national economic output.
Data shows inflation has declined mainly because of the reduction in international oil prices. International crude prices have touched $44 per barrel whose effect, according to MMS Securities, will continue to keep the CPI on the lower side during the rest of 2014-15.
The inflation-adjusted interest rate, also known as the real interest rate, for July-December remained 340 basis points, according to MMS Securities. The fact that the real interest rate is much higher than the historical average of 150 basis points makes a strong case for monetary easing, analysts say.
Although the widening real interest rate suggests a drastic cut of 100 basis points, most analysts believe the SBP will bring the discount rate to 9% on January 24.
“We anticipate the SBP to cut the policy rate by 50 basis points in the upcoming monetary policy statement and go for a cut of further 50 basis points later on,” said Topline Securities, noting that the SBP will follow a gradual policy of reducing the benchmark interest rate.
The SBP is expected to remain cautious in reducing the interest rate drastically because it is difficult to forecast the global oil prices after a sudden fall, it added.
Published in The Express Tribune, January 18th, 2015.
With most economic indicators justifying monetary easing in the next policy announcement, a majority of analysts expect the State Bank of Pakistan (SBP) to reduce the discount rate by at least 50 basis points.
SBP Governor Ashraf Mahmood Wathra will read the monetary policy statement at a press conference on January 24, according to the central bank’s spokesperson. The discount rate is the principal monetary policy tool that the central bank uses to control money supply in the economy.
After keeping it flat at 10% from November 2013 to November 2014, the SBP decreased the discount rate by 50 basis points to 9.5% at its last monetary policy announcement.
Reviewed every two months, it is the interest rate at which commercial banks are allowed to borrow from the central bank’s discount window on an overnight basis.
The Consumer Price Index (CPI) inflation clocked up at just above 6% during the first half of 2014-15, which is significantly lower than the CPI of 8.9% for the same six months of the preceding fiscal year.
Lower-than-expected inflation coupled with expectations of subdued CPI in the future typically prompt the central bank to opt for monetary easing. By making the availability of credit cheaper by means of an interest rate cut, the SBP helps businesses expand and grow the national economic output.
Data shows inflation has declined mainly because of the reduction in international oil prices. International crude prices have touched $44 per barrel whose effect, according to MMS Securities, will continue to keep the CPI on the lower side during the rest of 2014-15.
The inflation-adjusted interest rate, also known as the real interest rate, for July-December remained 340 basis points, according to MMS Securities. The fact that the real interest rate is much higher than the historical average of 150 basis points makes a strong case for monetary easing, analysts say.
Although the widening real interest rate suggests a drastic cut of 100 basis points, most analysts believe the SBP will bring the discount rate to 9% on January 24.
“We anticipate the SBP to cut the policy rate by 50 basis points in the upcoming monetary policy statement and go for a cut of further 50 basis points later on,” said Topline Securities, noting that the SBP will follow a gradual policy of reducing the benchmark interest rate.
The SBP is expected to remain cautious in reducing the interest rate drastically because it is difficult to forecast the global oil prices after a sudden fall, it added.
Published in The Express Tribune, January 18th, 2015.