SBP should maintain interest rate status quo


Pakistan’s central bank is expected to maintain its benchmark interest rate at 7% for the seventh consecutive time in a 15-month period until its next bimonthly monetary policy statement (MPS) which will be announced on Monday.

The State Bank of Pakistan (SBP) is very likely to hold the interest rate despite the fact that inflation has remained high and the real interest rate is currently at a negative level of 1 to 1, 25%. Therefore, the status quo will continue to support economic recovery in line with the government’s growth policies.

However, a small number of experts believe that the central bank could surprise the market by raising the rate by 25 basis points given current account vulnerabilities, the uptrend of the weekly sensitive price index and the resumption of the lending program of the International Monetary Fund (IMF).

If the interest rate remains unchanged, these analysts believe the SBP would suggest a token 25 to 50 basis point increase in monetary policy in November 2021 or January 2022 as part of its new global practice of forward deliberation.

The interest rate and the flexible rupee-dollar parity are the two main tools available with central banks around the world to control the reading of inflation and give direction to the economic trajectory of their respective countries.

The majority of experts said that the upward trend in inflation remains an international phenomenon and is not unique to Pakistan alone. The price increases are due to the scarcity of food, petroleum products and other raw materials in world markets and not to increased demand for these raw materials.

As a result, increasing Pakistan’s interest rate will make no sense in regards to inflation and will only hurt the economy which is on a growing momentum, as evidenced by increased imports. volumetric raw materials for industrial and agricultural production.

Topline Securities has surveyed major financial market participants on expectations for the Monetary Policy Statement (MPS) to be announced on Monday.

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“About 65% of the 68 participants in total do not expect any change in the policy rate in the next MPS, compared to 89% in the previous poll,” said Syed Atif Zafar, director of securities research at Topline, in a comment. “Almost 25% of respondents expect an increase of 25 basis points (bps) while 10% of applicants expect an increase of 50 bps or more.”

He said none of the participants expected the rate to drop.

However, “we (Topline) expect a 25bp hike in the policy rate given recent current account vulnerabilities, higher than expected SPI readings suggesting no decline in CPI inflation and starting discussions with the IMF on resuming the program, “he said.

Pak-Kuwait Investment Company (PKIC) research director Samiullah Tariq anticipated a status quo.

“The Covid-19 situation continued to weigh on the economy,” he said. “Second, the upward trend in inflation appears to be transient globally, so the central bank would hold the rate to support economic growth.”

He said inflation had hit a 10-year high in some developed economies, including the US and UK, but still kept their respective interest rates low to support activities. economic.

Inflation is currently on the rise, but is expected to decline later. “The annual inflation reading would remain close and close to the upper bound of the SBP’s projected inflation rate of 7-9% in FY22,” he said.

Alpha Beta Core CEO Khurram Schehzad predicted the status quo in interest rates. He argued that a symbolic increase in interest rates would not control imported inflation.

“The rate hike would only benefit the banking sector and hurt the national economy.”

“The IMF will not demand an interest rate hike because the rupee is being held up by the dynamics of demand and supply,” he added.

Arif Habib Limited, head of research, Tahir Abbas, said the inflation was due to the upward trend in global food and energy prices and pointed out that the prices of non-food and non-energy items remained under control.

“The central bank would maintain the status quo to help accelerate economic growth,” he said.

The SBP is expected to signal an interest rate hike in November 2021 or January 2022 this time, he said.

Posted in The Express Tribune, September 19e, 2021.

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