KARACHI: The rupee is expected to remain stable next week due to optimism ahead of the International Monetary Fund’s mission visit this month to hash out a new loan programme, traders and analysts said on Saturday.
A mission from the IMF is expected to visit Pakistan on May 15 to finalise the key components of the next bailout package under the $6–$8 billion Extended Fund Facility programme.
Finance Minister Muhammad Aurangzeb has stated that the country might have a staff-level agreement on the new programme by the start of July. The Fund and the government are already in talks for the new funding.
“We do not anticipate any significant changes in the value of the rupee in the coming sessions. This is because the demand and supply of US dollars are balanced, and there is a positive outlook on Pakistan's economy,” said a foreign exchange trader.
“The market sentiment has been bolstered by recent positive signals from the IMF and the visit of Prime Minister Shehbaz Sharif to Saudi Arabia,” the trader added.
This week, there was some fluctuation in the rupee in the interbank market. On Monday, the local unit closed at 278.39 to the dollar, and on Friday, it closed at 278.20. The release of a $1.1 billion last tranche from the IMF under the $3 billion stand-by arrangement caused the rupee to gain ground against the dollar.
The State Bank of Pakistan's reserves have reached the $9 billion mark following the IMF’s disbursement.
Even without a rate cut, the rupee was poised to remain stable; therefore, the lack of the cut only cements this outlook, said Tresmark in a note to its clients.
“Our outlook on the rupee remains unchanged where we see the local currency range-bound till June, after which we should expect a 2-rupee per month depreciation over the next 6 months, with December 2024 closing in the 292-295 range,” it said.
The SBP kept its benchmark interest rate unchanged at a record 22 percent for a seventh consecutive time on April 29 (Monday).
For the longest time, the SBP’s Monetary Policy Committee (MPC) emphasised that real interest rates on a 'forward-looking basis' were positive and so didn’t feel that a hike was required, even when inflation soared above 30 percent, said Tresmark.
For the last two months, real interest rates have been materially positive on a present basis, and yet there was no cut. The SBP brought in a new line of 'inflation target of 5-7 percent by September 2025.'
Traders are currently confused due to the shift from forward-looking to the inflation target, especially when considering the following factors: 1.
The Fed's pivot towards "higher for longer," 2. The IMF's review for a new package starting in mid-May, and 3. The plateauing inflation projections for May and June, which are expected to remain around 16-17 percent. This suggests that there won't be a significant drop in inflation in the near future, it said.
Does this mean that the likelihood of a rate cut in June has decreased, or is the central bank overcompensating for its failure to anticipate the rise in inflation?
“Analysts from different quarters now demand that the Central Bank give forward guidance to accompany the MPS [monetary policy statement] to avoid speculation and smother volatility,” it added."