State Bank expected to act modestly in March policy review for want of growth

KARACHI: The central bank is expected to act modestly in a policy rate decision scheduled on Friday as moderate growth outlook warrants a stimulus despite inflationary pressure, fiscal woes and IMF’s demand, analysts said on Wednesday.

The State Bank of Pakistan will announce the policy rate for the next two months in the second last monetary policy for the current fiscal year of 2018/19.

Some analysts believed that the SBP’s Monetary Policy Committee would increase interest rates due to persistently high inflation and elevated level of fiscal deficit.

“We see further 50 basis points’ hike in Friday policy review,” Saad Hashmi, research director at Topline Securities said.

The International Monetary Fund’s (IMF) precondition to adjust interest rate could be a reason for the interest rate hike in the upcoming monetary policy, Hashmi said.

IMF mission chief for Pakistan visited Islamabad and Karachi earlier this week for introductory meetings with the authorities regarding a bailout deal. “Discussions focused on recent economic developments and prospects for Pakistan in the context of ongoing discussions toward an IMF-supported program,” the IMF said in a statement. The SBP surprised markets in late January by raising policy rate by 25 basis points to a six-year high of 10.25 percent. The policy rate has been pushed up by a cumulative 450 basis points since January 2018.

Another analyst, however, said the size of the move would be modest and confined to inflation risks, fiscal outlook and the foreign exchange reserves.

“We expect monetary tightening to continue with a 25 basis points uptick in policy rate in the upcoming monetary policy announcement,” brokerage Taurus Securities said.

The central bank’s foreign currency reserves rose to around $11 billion as of March 25 due to financial inflows from Saudi Arabia, UAE and China. Current account deficit narrowed 22.6 percent to $8.844 billion in the first eight months of FY2019. Some analysts believed that the central bank would put further interest rate hike on hold at least in March policy review.

“I don’t expect rate hike,” Fawad Khan, head of research at BMA Capital said. “The central bank should maintain rate at the current level given inflation outlook.”

The SBP didn’t bring any change to its inflation forecast of 6.5 to 7.5 percent for the current fiscal year from its earlier stance in the January’s monetary policy statement. The central bank then said the second round impacts of the exchange rate movements, upward adjustments in gas and electricity tariffs and higher government borrowing from the SBP are likely to be offset by the lagged impact of the increase in policy rates and the fall in international oil prices.

Former finance minister Salman Shah attributed no-hike scenario to subdued growth.

“I think the case for further raising policy rate seems fade somewhat due to slower growth,” Shah said. “The SBP should maintain the interest rates as higher borrowing costs will continue to drag on economic activity in coming months. The SBP should adopt a wait and see approach till next quarter’s data come to further policy changes.”

The SBP revised down its projection for real GDP growth by 0.5 percent to 3.5-4 percent for FY2019. The government had targeted the full-year growth at 6.2 percent.

Economists agreed that annual growth is likely to remain significantly moderate mainly due to slowdown in the growth of agriculture sector and stabilisation measures taken to introduce macroeconomic stability.