Central bank seen raising policy rate

Higher inflation may pave the way for a hike.

KARACHI: A Reuters’ poll found that eight out of 13 analysts expect the central bank to increase its key policy rate by at least 50 basis points to 14 per cent, to combat double-digit inflation.

Faysal Asset Management predicts a 100 basis points rise, while Silkbank, Topline Securities, NIB Bank, Invisor Securities, Invest and Finance Securities, Invest Capital Investment Bank, Citibank and AKD Securities all predict a 50 basis points  increase. IGI Securities, Meezan Bank, Global Securities and JS Global expect no change in the discount rate.

Consumer inflation hit a 17-month high in September before easing slightly in October but devastating floods and pressure for reform from the International Monetary Fund, which bailed the country out of a financial crisis in 2008, will keep prices elevated, analysts said.

“Inflationary pressures are likely to persist for the remainder of fiscal year 2010-11 with the CPI inflation expected to average 17 per cent for the second half of the year,” said Ayub Ansari, analyst at Invest and Finance Securities.

The State Bank of Pakistan (SBP) forecasts that inflation will average between 13.5 and 14.5 per cent in 2010-11, well above a government target of 9.5 per cent. The IMF has forecast average inflation of 14 per cent.

A rise of 50 basis points in the key policy rate would mark the third straight increase of that magnitude after devastating floods in July and August caused $9.7 billion in damages and pushed food prices higher.

The government borrowed a provisional Rs178.8 billion ($2.09 billion) from the central bank between July 1 and November 5. The minority view is that the State Bank will leave rates unchanged and wait until January to raise them again.

The current account produced a surplus in September and October, after three months of deficits, which they say will boost the rupee and so offset imported inflation.

A sustained pick-up in the currency could persuade the central bank that it can ease up on the pace of rate rises.

Published in The Express Tribune, November 27^th, 2010.