SBP expected to keep policy rate stable at 6pc

KARACHI:  The central bank is expected to keep its benchmark interest rate on hold for a third straight time as growing concerns over a weakening rupee is likely to take priority over below-target inflation, analysts said on Friday.

They said an increase in debt payment by June this year may increase depreciation pressures and further weaken the rupee despite an uptick in month-on-month inflation number during the month of March. 

“The SBP (State Bank of Pakistan) may adopt cautious approach in the upcoming monetary policy announcement,” said Khurram Schahzad at JS Global Capital. “The bank is likely to keep the policy rate unchanged due to pressure of debt repayment by June 2016…. The International Monetary Fund’s (IMF) loan program is also concluding at the end of the current fiscal year.”

The bank's monetary policy committee will meet today to review the current policy rate of six percent. The central bank revised down the policy rate to the multi-year low in September 2015, whereas it kept the rate unchanged in the subsequent monetary policies in November 2015 and January 2016.

Analysts said consumer price inflation may witness the impact of the recent rise in international oil prices in the coming months.  Still inflation will remain far below the annual target of six percent.  The consumer price index (CPI) inflation inched up 0.15 percent in March mainly due to the low-base effect. However, the CPI reading was 3.94 percent year-on-year in March as compared to 2.49 percent in the same month last year.

Analysts said although the disappointing report on inflation may keep discussion of a rate hike alive but the market believes that the policy rate will remain on hold for the time being.

“Rupee could weigh on the central bank’s decision as the ongoing Middle East crisis may potentially tighten the supply of remittance in the month ahead, thus making the currency little venerable,” said an analyst. 

The State Bank, in its second quarterly review, said the current levels of the foreign currency reserves “can comfortably finance twice as much payment as are expected for the next 12 months” as it had accumulated a significant amount of liquid reserves over the past couple of years. 

The SBP said an improvement in fiscal position is likely to be maintained for the second half of the current fiscal year and the tax measures, announced in October 2015, will continue to help the authorities increase revenue collection, while expenditures are expected to remain within the target. “The pattern of budgetary financing will not be much different in the second half than the first, as the government is expecting more external funding down the road,” the bank’s report said.

Muhammad Affan Ismail at BMA Capital said a few people are anticipating a nominal cut in the policy rate owing to an expected three percent real interest rate in the last quarter of the current fiscal year. 

Ismail said the SBP may be wary of emanating risks; such as the end of receipts from the IMF would exert some pressure on the exchange rate in the coming months. “Secondary market indicators, (almost unchanged yields on treasury     bills since last monetary policy), also signal towards a status quo in interest rates,” he added.

Analysts at Taurus Securities, however, are eyeing a cut, based on the SBP’s forecast that CPI inflation would stay around three to four percent as against the government target of six percent. As the CPI is likely to stay at the lower level for a longer period, there are high chances of further monetary easing in the upcoming months, they said.