KARACHI:
Pakistan’s central bank is scheduled to meet on Monday to announce the key policy rate for the next six weeks.
The bank is highly expected to increase the rate by 100 basis points (bps) to 13.25% to counter a high inflation reading and likely surge in energy prices to pave the way for reviving the International Monetary Fund (IMF) loan programme.
The monetary policy decision may, however, not be as predictable this time around as anticipated by a large number of financial market participants.
Things at the global, regional and domestic levels in the political and economic arenas remain highly uncertain.
The autonomous central bank may move to increase the policy rate by more than the market consensus for 100bps. Its likely stronger action may be aimed at supporting the falling rupee against the US dollar, discouraging imports, saving foreign exchange reserves, bringing some stability on the macroeconomic front and reviving the IMF programme.
It may go an extra mile before it is too late to fix the economic ills considering that the government has kept delaying tough economic decisions like removing subsidy on petroleum products and electricity before all government allies arrive at a consensus.
The inaction has triggered the rupee’s slide, which has shed 7.70% of its value and has hit an all-time low at Rs200.14 against the greenback in the past 11 consecutive working days.
The currency depreciation has pushed Pakistan’s bond yields to a historic high at 24% in the global market whereas the foreign exchange reserves have dived to the critically low level at $10.2 billion, covering only six weeks of import.
Another possibility is that the central bank may increase the policy rate by less than the market consensus for different reasons such as the jump in inflation reading to a two-year high at 13.4% in April was due to a massive hike in prices of global commodities including crude oil and not because of the rise in demand for commodities.
Moreover, the government may not want to see an aggressive increase in the benchmark interest rate to avoid criticism from business circles, as a big rate hike will hurt businesses and economic activities.
Earlier, the central bank jacked up the policy rate by 250 basis points to 12.25% in an emergency meeting on April 7. The bank has cumulatively increased the rate by 525 basis points since September 2021 to control inflation and narrow the current account deficit.
Arif Habib Limited (AHL) economist Sana Tawfik anticipated a 100bps hike in the policy rate.
She said the government would soon consider rolling back the fiscal relief measures (subsidy on energy products) in order to revive the IMF’s loan programme, as talks between Pakistan and the lender were going on in Doha.
The IMF has conditioned the resumption of loan programme on the removal of subsidy on petroleum products and electricity.
“This step of the government is likely to further augment inflationary pressures (taking the reading to 15% or higher), hence the SBP may want to act proactively and consider a rate hike in the upcoming meeting,” she said in a commentary.
AHL and Topline Research conducted surveys to know about the expectations of financial market participants about the rate hike.
Both the research houses got almost similar results. According to them, most of the participants (80-85%) foresee a 100bps hike, while the remaining anticipates movement in the range of zero to 250bps.
Topline Research also projected a 100bps rise. Its analyst Umair Naseer said “it will be interesting to see the SBP’s stance as this will be the first monetary policy statement (MPS) after the recent change in government and appointment of Dr Murtaza Syed as the SBP acting governor.”
Taurus Securities Head of Research Mustafa Mustansir said its house expectation for a 100bps hike emanated primarily from the movement in both primary and secondary market yields on government securities, and “not so much due to the outlook for inflation, which is supply-driven”.
“Short-term secondary market yields are on an average 268bps above the current policy rate of 12.25% as per latest data. The same are up 200bps since the last MPC meeting in April. Similarly, the cut-off yields in the last T-bills’ auction recorded an average spread of 261bps over the policy rate of 12.25%.”