No rate cut expected from SBP as inflation stays high: poll

KARACHI: The State Bank of Pakistan (SBP) is likely to keep its benchmark interest rate unchanged at 22 percent for a fourth straight meeting on December 12 as inflation remains elevated, a survey of analysts and market participants showed on Saturday.

However, some market players are expecting a rate cut this month, as inflation is forecast to ease in the first quarter of 2024 due to a favorable base effect.

They said the central bank may announce its first interest rate cut in more than three and a half years on December 12 "because inflation is expected to decline in the first quarter of 2024 as a result of the supportive base effect".

The consumer price index (CPI) inflation increased to 29.2 percent in November from 26.8 percent in the previous month due to a hike in gas prices.

The Monetary Policy Committee of the SBP will consider several economic data in addition to inflation while making its next policy decision. The current account deficit rose to $74 million in November from $46 million a month ago. The rupee has mostly stayed steady compared to the US dollar. Moreover, local fuel prices have decreased by an average of 3 percent and international oil prices by approximately 7 percent.

“Though the majority of market participants expect ‘no change’ in interest rates in upcoming Monetary Policy Meeting, 1 in 3 participants think rates can come down,” said Mohammed Sohail, the CEO of Topline Securities.

“It will be a key decision for central bank committee. On a forward-looking basis, inflation is likely to ease after a massive increase in electricity and gas prices. Thus, any reduction in policy rate will not be a surprise,” Sohail said.

“If not in this meeting, rates have to come down in the coming months. The money market is already expecting a 3 percent to 4 percent cut in the next 6 months.”

In addition to persistently high inflation, Tresmark notes that bond dealers' pushback for higher yields has delayed calls for rate cuts.

“Inflation is widely expected to fall in the Jan-Mar quarter but it’s too early to say where the policy rate will land in the next MPC. But surely a dovish stance by the Fed will help in justifying a rate cut here,” Tresmark said in a weekly note.

The SBP will make its upcoming monetary policy decision as the country awaits the International Monetary Fund's next disbursement of around $700 million under its existing $3 billion loan programme. The total amount disbursed by the IMF will reach $1.9 billion if the due tranche is approved by its board this month.

This week, Saudi Arabia made a positive development by extending the duration of a $3 billion deposit it made with the SBP by another year.

“I expect no change in interest rates. Though the balance of payments is under control, however, inflation is still around 29 percent,” said Samiullah Tariq, the head of research at Pak-Kuwait Investment Company.

A Topline Research survey indicates that sixty-three percent of respondents anticipate the policy rate to stay at 22 percent. Eight percent of participants anticipate a reduction of 50 basis points (bps), 19 percent anticipate a reduction of 100 bps, 2 percent anticipate a reduction of 150 bps, 6 percent anticipate a reduction of 200 bps, and 2 percent anticipate a reduction of more than 200 bps.

To rein in high inflation, the SBP has significantly raised interest rates by 15 percentage points to 22 percent since September 2021. Because of the high base effect, analysts anticipate that inflation will trend lower in the second half of this fiscal year. To further protect inflation from interruptions, the government must enforce strict administrative monitoring and preserve the stability of the local currency.

Analysts predict that average inflation for FY24 would be 24.1 percent, down from 29 percent the previous year.