KARACHI: The central bank is expected to revise interest rate upward for the next two months in the monetary policy scheduled on March 30 as rupee devaluation has set the stage for inflation spike, analysts said on Wednesday.
The analysts expect 25 to 50 basis points increase in the key policy rate by the State Bank of Pakistan (SBP) as a step to tame consumer demand and avert upward pressure of weak rupee on inflation.
“SBP seems to increase policy rate by another 25 basis points to 6.25 percent to prevent the economy from overheating, while sticking with a plan to gradually raise interest rates,” an analyst said. “We see very little chance of an unchanged policy rate at this week’s meeting.”
In the last monetary policy statement in January, the SBP’s policymakers turned hawkish by raising the policy rate by 25 basis points to six percent as a preemptive measure to overcome growing economic challenges. The central bank had maintained the policy rate at 5.75 percent for 20 months.
On March 20, rupee depreciated 4.43 percent to 115 against the US dollar. Balance of payments continued to weaken. The country’s current account deficit widened 50 percent to $10.826 billion in the first eight months of the current fiscal year of 2018.
The International Monetary Fund, in its recent post-program monitoring report, called for further exchange rate flexibility and interest rate hikes to address domestic demand pressure, external account vulnerabilities and an expected increase in inflation.
Brokerage Taurus Securities anticipates 50 basis points increase to take policy rate to 6.5 percent. “We view that the hike will balance the depreciating rupee, while lessening growing consumer demand,” it said in a report.
The brokerage estimated the consumer price inflation reading for March at 3.26 percent year-on-year decelerating from February’s 3.8 percent owing to high base effect. Analysts further said SBP is likely to raise policy rate to seven percent by the end of FY2018.
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