Central bank likely to prune discount rate on soft inflation

KARACHI: Pakistan annual pace of inflation eased in February as the drop in petroleum prices accelerated due to the plunge in international oil prices, pointing to another interest rate cut of at least 50 basis points, analyst said on Friday.
The State Bank’s board of directors will meet today to decide a policy stance for March–April 2015 period.
Analyst said posted their biggest drop since 2008 as oil prices continued to tumble, which gives cautious central bank enough ammunition to keep its policy stance soft for a bit longer.
“The central bank has room to reduce the discount rate by at least 50bps, perhaps up to 100bps, but given the uncertainty in inflation trend in the months ahead, the State Bank may adopt a cautious approach and prefer to cut it by only 50bps in March monetary policy review,” said Sakib Sherani, former economic adviser and CEO at Macroeconomic Insights.
The headline monthly inflation, measured by the consumer price index (CPI), was recorded at 3.24 percent in February 2015 compared to 3.88 percent in the previous month and 7.99 percent in February 2014. Pakistan is long plagued by double-digit price and is not immune to falling crude oil prices and low inflation.
The central bank’s board of directors, while making the monetary policy decision, bear in mind to maintain price, currency and monetary stability, driving economic growth—steering private businesses’ stimulus.
The central bank slashed key interest rate by one percentage point to 8.5 percent in its last policy announcement in January.
Some economists warn the falling inflation scenario may face vulnerabilities if the global oil prices go up again.
“The central bank looks poised to trim the discount rate by 50bps, as weak global oil and commodity prices pushed the headline monthly inflation rate measured by the consumer price index as low as 3.24 percent last month,” said an official of the Financial Markets Association.
“Going forward, inflation is likely to continue to fall between 2 and 2.5 percent in the coming months.”
The official said yields on Pakistan’s market treasury bills are on the decline, the central bank’s forex reserves are at a comfortable level, the current account deficit is narrowing and recovery in the equity market; and improvement in the macroeconomic indicators signal the State Bank will continue with the soft monetary policy stance.
In a latest auction, yields on a benchmark six-month government paper fell to 7.9869 percent.
Though, the foreign exchange reserves of the central bank are at a comfortable level of $11.2 billion as of March 13, the currency market witnessed some pressure, as the rupee crossed the barrier of 102, trading at 102.08 against the dollar in the interbank market on Friday.
There are some reasons to be optimistic on the outlook of the balance of payments for FY15, the analyst said.
Economists said apart from falling international oil prices, there are some other triggers for the State Bank to reduce the discount rate, major improvement in the external sector of the economy.
The current account deficit narrowed to $1.614 billion in the eight months of the current fiscal year, while posted a surplus of $877 million following strong foreign exchange inflows.
The State Bank received $717 million on account of the Coalition Support Fund, an amount of $43 million from multilateral, bilateral and other sources and $51 million from the International Development Association during February.
Economists see the current account deficit to continue to decline by the end of the current fiscal year.
The International Monetary Fund (IMF) is likely to release six tranches of $550 million by the end of this month.
And, the government has started the process of selling its stake in the Habib Bank Limited (HBL) that would provide forex support to the country.