Popular opinion says status quo to be maintained

Majority research houses expect no change in interest rate.

KARACHI: McLeod Road expects the State Bank of Pakistan (SBP) to maintain the status quo on the monetary policy front by keeping the target rate flat at 6% for the next two months.

Expected uptick in inflation in coming months and a weak currency are the chief reasons for brokerage houses’ expectation of the status quo in the next monetary policy that the SBP will announce on Saturday.



The discount rate is the interest rate at which commercial banks are allowed to borrow from the central bank’s discount window on an overnight basis. Central banks use this monetary policy tool to control money supply in the economy in order to achieve price stability and economic growth targets. Currently, the discount rate is 6.5% while the newly introduced target rate stands at 6%.

The SBP reduced the target rate from 6.5% to 6% in its last announcement in September after bringing it down by 300 basis points in 2014-15.



The Express Tribune polled AKD Securities, Taurus Securities, Global Securities, Elixir Securities, Shajar Capital, Standard Capital Securities, Intermarket Securities, BMA Capital, Spectrum Securities and Standard Chartered Bank for their call on the monetary policy announcement.

Only one of the 10 research houses (Standard Capital Securities) anticipates a decrease of 50 basis points in the target rate while the rest expect the SBP to keep it unchanged for the next two months.



Speaking to The Express Tribune, Intermarket Securities Head of International Sale Dr Gohar Rasool said inflation would go up at a rate higher than the one seen in recent months. “The high-base effect will start eroding from this month … the SBP may choose to hold ground for now,” he said.

Year-on-year inflation, as measured by the consumer price index, increased from 1.3% in September to 1.6% in October.

Rasool added that the US Federal Reserve is expected to increase interest rates in December, which will strengthen the dollar and devalue the rupee. “The SBP might want to hold off on further easing for now,” he said.

AKD Securities expects inflation to be around 6% in calendar year 2016 as opposed to the estimate of approximately 2.5% in calendar year 2015. Its opinion is based on expected gas and power tariff increases and uncertainty in crude oil prices, where a sudden uptick can cause a reversal in the policy rate next year.



“A slowdown in foreign exchange inflows post-2015-16, risk of imported inflation from a weaker currency and a negative impact on deposits growth can encourage the SBP to maintain the status quo,” according to AKD Securities analyst Muneeba Shoaib.

The rupee has lost 3.6% since the beginning of 2015-16 while deposits have registered negative growth of 1.3% on a quarterly basis in July-September.

Declining yields on PIBs

An interest rate cut should be in the offing if the latest auction of the Pakistan Investment Bonds (PIBs) held on Wednesday is any guide. The yields on PIBs of different tenors declined up to 18 basis points in Wednesday’s auction.

After all, the yield on a bond is inversely related to its price. So an increase in the bond prices means people are keen to lock in their investments before the interest rate cut kicks in.



This is an indication, Standard Capital Securities Head of Research Faisal Shaji says, that the SBP is going to cut the benchmark interest rate by 50 basis points.

However, Elixir Securities analyst Iqbal Dinani interprets the recent decline in the PIB yields differently. “We believe the banking community expects the policy rate to remain at the same level. However, the decline in yields could potentially explain the government’s non-willingness to borrow money at a higher rate,” he said.

Published in The Express Tribune, November 20^th, 2015.

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