SBP expected to keep interest rate at 5.75%: The Express Tribune survey

KARACHI: The State Bank of Pakistan (SBP) is expected to leave the key interest rate unchanged at 5.75% in its next bi-monthly Monetary Policy Statement (MPS) due on Friday (today) due to soft inflation, according to The Express Tribune survey.

However, anticipating gradually mounting inflationary pressures from January onwards, majority of the houses foresee the first interest rate hike in March’s MPS in the range of 25-50 basis points, according to the result of the survey conducted by putting forth the query to major securities’ brokerage houses.

The central bank has kept the discount rate unchanged at 5.75% since May 2016. This is the lowest level in four decades.

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The interest rate was in double digits at 10% in the first half of fiscal year 2012-13 before easing inflationary pressure led to a decline in the interest rate.

Rupee depreciation against the US dollar and rising international oil prices, which plays a significant role in Pakistan’s import bill, could fuel inflation in the country.

The anticipated change in rupee-dollar parity and expensive imports, which remain two dominating factors for uptrend in inflation, would also widen the current account deficit and eat up foreign exchange reserves in domino effect.

The brokerage houses anticipated inflation in the range of 4.6-5.2% in fiscal year 2018 against the government’s target of 6%. They foresee the local currency in the range of Rs112-118 to the US dollar by June 30, 2018.

Topline Securities Head of Research Saad Hashmi said the previous week’s trends for treasury-bill auction suggested the first rate hike in March of 25 basis points.

Commercial banks bought only three month T-bills and did not participate in the auction for six month- and 12-month T-bills. “The trends suggest banks are anticipating the first rate hike in the next three months,” he said.

Arif Habib Limited Head of Research Tahir Abbas said “we are expecting 25-50 basis points hike in the discount rate in March’s Monetary Policy Statement … higher chances are for 50 basis points (in March).”

The rate hike numbers would depend upon rupee depreciation in the aftermath of the IMF post-programme monitoring measures. The depreciation may convince authorities to increase the interest rate while inflation remains below the target, he said.

The central bank would increase the interest rate to keep the ‘real interest rate’ favourable which at present stands at 1.87% with interest rate at 5.75% minus the six-month average inflation at 3.88%.

“The central bank targets the monthly inflation rate, which came at 4.57% in December. It is expected to further ramp up and reduce the real interest rate till next monetary policy likely in March-end,” he said.

The housing indexation and consumerism may be other factors to contribute towards ramping up inflation, he said.

Two extremes

However, two brokerage houses took two extreme positions. One expected a 25-basis point hike in today’s policy announcement, while the other anticipated the first hike in September 2018.

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EFG Hermes Chief Executive Officer Muzammil Aslam said the SBP would make a symbolic hike of 25 basis points to give a signal that days for soft monetary policy are over

AKD Securities’ analyst Umer Farooq said the government would not increase rate before September 2018 to let the private sector borrow for economic expansion, while inflation remains below the government target of 6%.

Published in The Express Tribune, January 26th, 2018.

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