Markets anxious as SBP mulls policy


Pakistan’s central bank is scheduled to meet on Friday (today) to, review developments in the domestic and Global economy and, announce its key policy rate to maintain a balance between economic growth and inflation readings.

Going forward, financial experts and market surveys strongly anticipate that the rate will remain unchanged at the current level of 15%.

Speaking to the Express Tribune, Head of Research at Ismail Iqbal Securities, Fahad Rauf said, “The current objective of the government and central bank is to achieve economic stability – not the revival of growth.”

“The limited availability of resources, mainly foreign exchange reserves and fiscal space, do not allow the government to push for a revival of growth at the present moment,” he explained.

“With the floods having further aggravated the country’s economic slowdown, growth is estimated to stand at around 2% or less in the current fiscal year,” added Rauf.

“The government had targeted a growth rate of 5% for FY23, as compared to 6% in the previous two consecutive fiscal years. The central bank, however, revised down its growth projection to 2% after the floods hit, as compared to 3-4% before the monsoon floods hit hard and resulted in estimated losses worth over $30 billion,” he noted.

“At the same time, the inflation reading has peaked at 27% in previous months but is still estimated to remain higher than the central bank’s projected average monthly figure of 18-20% over the next few months. We have an estimated inflation reading of 24% for November 2022, as compared to 23.2% in October 2022,” he elaborated.

KASB Securities Head of Research, Yousuf Rahman explained that, “The present slowdown in economic activities will not allow the bank to increase its benchmark interest rate in Friday’s monetary policy committee (MPC) meeting, as another increase will further dampen economic activities.”

“On the other hand, the higher than targeted average inflation reading will not allow the bank to cut the rate either, as reducing the rate may revive aggregate demand and provide a basis to keep inflation on the higher side,” he noted.

“Among relevant economic indicators, the rupee has remained largely stable in the past two months and the current account deficit (CAD) has also narrowed. The International Monetary Fund (IMF), however, has delayed its ninth review of the domestic economy, which has also delayed new foreign loan inflows that are anxiously awaited,” explained Rahman.

Recalling the statement given by the central bank in its previous monetary policy announcement six weeks ago, Arif Habib Limited (AHL) Economist, Sana Tawfik said, “The existing rate prudently reflects a balance between maintaining growth post-floods and managing inflation.”

Sharing the results of a market survey, she noted that, “84.2% of the respondents are of the view that the SBP will keep the policy rate unchanged at 15%.”

The respondents included banks, asset management companies (AMCs), insurance companies, development finance institutions (DFIs), oil and gas exploration firms and cement, fertiliser, steel textile and pharmaceutical manufacturers.

According to the survey results, 15.8% of the total respondents expect a rate hike, whereas 10.5% are expecting a rate hike of 100 basis points. In addition, 5.3% are foreseeing a rate hike of 150 basis points or above.

On July 7, 2022, the State Bank of Pakistan (SBP) hiked the key policy rate by 125 basis points to 15%. It also maintained the rate at its current level in two previous monetary policy statements, announced in August 2022 and October 2022 respectively.

On Friday, the SBP will also be announcing its monetary policy calendar up to June 2023.

Sharing its market survey results, Topline Securities Director Research, Umair Naseer said, “Market participants think the policy rate will be less than what it is now by June 2023. 35% of the participants expect the policy rate to be in the range of 14-15% while 27% expect it to be in the range of 13-14%. Likewise, 19% anticipate it to be in the range of 12-13% by June 2023.”

In terms of the current account deficit (CAD), 62% of the respondents expect it to be in the range of $8-12 billion in FY23; 21% expect it to be below $8 billion and 16% project it to be over $12 billion in the coming year.

“The results are also in line with our estimates where we think that the policy rate will remain unchanged in the upcoming monetary policy statement. From the current peak, we can see a decline in policy rates in the second half of the current fiscal year of 2023,” predicted Naseer.

Published in The Express Tribune, November 25th, 2022.

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