KARACHI: The State Bank of Pakistan (SBP) is expected to hike interest rates further in its upcoming policy review due next week to fight soaring inflation and unlock a stalled IMF deal, a brokerage firm said on Wednesday.
The central bank’s next Monetary Policy Committee (MPC) meeting will be held on April 4 (Tuesday). Speculations are that in order to resume a stalled $6.5 billion bailout package, the International Monetary Fund (IMF) demands another 200 basis points (bps) rise in the policy rate, which will take the policy rate at a record 22 percent.
The government borrowing costs have increased as commercial banks rise financing rates to a record high of 22 percent. Also, it might force the SBP to increase interest rates during its upcoming policy review.
In the first week of March, the central bank increased its key interest rate by 300 basis points, bringing it to 20 percent - highest borrowing cost seen since 1996.
“We expect 100-200 basis points (bps) increase in upcoming MPC meeting considering higher than expected inflation and rupee devaluation against US dollar where we see CPI [consumer price index] inflation in FY23 to average at around 28 percent,” said Topline Research in its note.
The SBP in its last policy review on March 02 also expected average inflation for FY23 to be in a range of 27-29 percent. “The CPI is likely to show a YoY [year on year] increase of more than 34 percent, we estimate,” it said.
The CPI has increased by 31.5 percent year-on-year in February, compared with 27.6 percent in the previous month. Urban core inflation (non food non energy) stood at 17.1 percent in February from 15.4 percent in January. Rural core inflation increased to 21.5 percent in February versus 19.4 percent in the previous month.
In order to gauge the view on monetary policy outlook, Topline Research conducted a poll of key market participants on expectations over policy rate and key macro estimates. As per the survey, majority of the participants (92.5 percent) expects the policy rate to increase by at least 100bps. Out of those, 63 percent participants expected a 200 bps increase, and 5 percent participants saw a 300bps increase, while 8 percent participants expected no change in the policy rate.
In response to a question on the International Monetary Fund’s ninth review, 15 percent participants did not expect a staff level agreement (SLA) to happen with the IMF. 16 percent participants hoped a SLA within the next 2 weeks, while 31 percent participants expected the agreement in 2-4 weeks. Around 37 percent participants envisaged the deal with the IMF after four weeks.
Responding to the question on where they participants see the policy rate in 12 months, 8 percent of the participants anticipated the rate to be above 22 percent and 19 percent participants expected to be between 20-22 percent. Around 25 percent expected the policy rate to be between 18-22 percent. On the other hand, 48 percent participants saw the rate below 18 percent of which 18 percent participants expected policy rate below 16 percent.