SBP is likely to raise interest rates by 100bps in the next policy review

A representative image of the State Bank of Pakistan (SBP) building. — AFP/file
  • The monetary policy meeting begins on April 4.
  • SBP conducts a survey to find out what the market expects.
  • This month’s policy rate was raised by 300bps to 20%.

KARACHI: The State Bank of Pakistan (SBP) is expected to raise it interest further in the upcoming policy review next month to combat rising inflation, the news reported Sunday, citing a brokerage firm.

“The Monetary Policy Committee will begin its next meeting on April 4, and we expect that SBP to raise its policy rate by 100 bps (basis points) to 21% at this meeting,” Arif Habib Limited (AHL) said in a note.

The company conducted a survey (poll) to find out what the market expects in the upcoming monetary policy by taking feedback from various sectors.

According to the research findings of the survey, 57.7% of the total respondents are of the opinion that the SBP will raise the policy rate, of which: 30.8% expect a rate hike of 100bps, 26.9% expect a rate hike of 200bps. 42.3% of the total respondents are of the opinion that the policy rate will remain unchanged at 20%.

This month the key interest rate was increased by a huge one 300 bps to 20%. According to the Monetary Policy Committee, the decision was made on inflation risks. Due to external and fiscal adjustments, the risks identified in the previous policy meetings had materialized and become partially visible in the consumer price index (CPI). Moreover, the MPC also revised its CPI forecast for the year to 27-29% against earlier forecast of 21-23%.

“Inflation in the coming months is likely to remain high as the impact of external and fiscal adjustments (including additional taxation, tariff increases, currency weakening and the ‘Ramadan factor’) unfold,” AHL said.

“Average inflation for 8MFY23 clocked in at 26.2% compared to 10.5% in the same period last year. Core inflation continues to creep higher each month as inflationary pressures build and widen, reflecting the spillover effects of the PKR weakening mid- ongoing debt repayments and lower financial inflows,” it added.

Since the last monetary policy announcement in March, the rupee has lost 1.2% of its value against the dollar. These external account challenges persist despite a significant narrowing of the current account deficit, which was recorded at $242 million in January (the lowest since March 2021), mainly on the back of lower imports, down 38% YoY for years with the measures taken by the authorities to limit imports. fall in international commodity prices.

“Apart from controlling inflationary pressures, the decision to raise the policy rate will also facilitate the long-awaited Ninth Review with the IMF, which is crucial for Pakistan to receive a $1.2 billion tranche and unlock further inflows from other international creditors,” it said. .

The market’s reaction to rising inflation is evident in the recent rise in bond market yields, driven by investors’ positive outlook.

By March 8, 2023 Market Treasury Bills (T-Bill) auction, the cut-off interest rates of three-month, six-month and 12-month maturities increased by 105bps, 95bps and 120bps compared to the previous auction. With the data available since June 1998, yields in all three tenors are at their historic highs.

Moreover, if “we look at the shape of the yield curve to extrapolate the markets’ expectations for monetary policy, we see that secondary market rates since the last monetary policy in March 2023 have also increased to 20.93%”. It can be safely assumed that the market also expects the SBP to raise the policy rate in the coming policy, according to AHL.

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