Central bank likely to raise interest rate in next review

KARACHI: The State Bank of Pakistan (SBP) is expected to hike interest rate further at its upcoming policy review due next month to combat surging inflation, a brokerage firm said.

“The monetary policy committee is set to commence its next meeting on April 4th and we expect the SBP to raise its policy rate by 100 bps (basis points) to 21 percent in this meeting,” said Arif Habib Limited (AHL) in a note.

In order to find out what the market is expecting in the upcoming monetary policy, the AHL conducted a survey (poll) taking feedback from various sectors. According to the survey poll results, 57.7 percent of the total respondents are of the view that the SBP will increase the policy rate, of which: 30.8 percent are expecting a rate hike of 100bps, 26.9 percent are foreseeing a rate hike of 200bps. 42.3 percent of the total respondents are of the view that policy rate will remain unchanged at 20 percent.

This month the policy rate was increased by a whopping 300bps to 20 percent. As per the Monetary Policy Committee, the decision was taken on inflation risks. Due to external and fiscal adjustments, the risks that were identified in the previous policy meetings, had materialised and become partially visible in the consumer price index (CPI) numbers. Moreover, the MPC also revised its CPI forecast for the year to 27-29 percent against earlier forecast of 21-23 percent.

“Inflation in the upcoming months is likely to remain elevated as the impact of external and fiscal adjustments (including additional taxation, tariff hikes, weakening of currency and ‘Ramadan factor’) unfolds,” the AHL said.

“The average inflation for 8MFY23 clocked-in at 26.2 percent compared to 10.5 percent in the same period last year. Core inflation continues to creep higher each month as inflationary pressures rise and broaden, reflecting the spill over effects of the PKR weakening amid ongoing debt repayments and lower financial inflows,” it added.

Since the last monetary policy announcement in March, the rupee has lost 1.2 percent of its value against the dollar. These external account challenges persist despite significant contraction in the current account deficit, recorded at $242 million in January (lowest since March 2021) mainly on the back of lower imports, down 38 percent YoY with the measures taken by the authorities to curb import along with decline in international commodity prices.

“Besides controlling inflationary pressure, the decision to raise the policy rate will also facilitate the long-awaited ninth review with the IMF, which is crucial for Pakistan to receive tranche of USD 1.2bn and unlock further inflows from other international creditors,” it said.

The market’s reaction to surging inflation is evident from the recent rise in bond market rates, which has been driven by investors’ bullish outlook.

In latest March 8, 2023 Market Treasury Bills (T-Bill) Auction, the cut-off yields of three-month, six-month and 12-month tenor increased by 105bps, 95bps and 120bps compared to the previous auction. With the data available since June 1998, yields in all three tenors are at their historic high levels.

Moreover, if “we look at the shape of the yield curve to extrapolate markets’ expectations for monetary policy, we see that the secondary market yields since the last monetary policy of March 2023 too, have increased to 20.93 percent”. It can be safely assumed that the market too expects SBP to increase the policy rate in the upcoming policy, according to AHL.