SBP poised to hold rate as economic headwinds persist

KARACHI: The State Bank of Pakistan (SBP) is likely to keep its policy rate on hold this week to continue to support an economy struggling with surging coronavirus cases, and wary of increasing inflationary pressures, analysts forecast on Tuesday.

The central bank left interest rates unchanged at 7 percent for a third consecutive meeting in January after slashing them five times last year by a total of 625 basis points (bps).

The SBP’s Monetary Policy Committee (MPC) will meet to review rates on March 19 (Friday).

A majority of analysts surveyed sees the policy rate to remain steady in the upcoming meeting in light of forward guidance given by the MPC on the monetary policy. The policymakers, in the last statement, clearly indicated to keep rates on hold in the near term until there are clear signs that the economy is recovering.

“As the recovery becomes more durable and the economy returns to full capacity, the MPC expects any adjustments in the policy rate to be measured and gradual to achieve mildly positive real interest rates,” the SBP in January monetary policy statement said.

However, the recent rise in T-bills and bonds yields suggests investors are starting to anticipate a tightening of monetary policy sooner than anticipated to accommodate a potential jump in inflation.

Based on data for secondary market yields, yields have increased 19 bps on the short-term T-bills and 23 bps for long-term bonds on an average.

The primary cut-off yields on both T-Bills and fixed-rate Pakistan Investment Bonds are up 51 bps and 131 bps, respectively.

Analysts are unanimous the supportive stance from the central bank will unlikely remain in place since May.

“After guidance we expect no change in rate though both T-bill and KIBOR [Karachi Interbank Offered Rate] is rising. Going forward due to IMF [International Monetary Fund] conditions and rising commodity prices interest rates in Pakistan will rise gradually,” said Mohammed Sohail, CEO at Topline Securities.

The IMF and Pakistan reached a staff-level agreement on reforms that will allow the release of around $500 million in funds. The Fund’s executive board is expected to approve the pending reviews of the IMF-supported reforms later this month or maybe early next month.

The international financial institutions such as IMF and World Bank expect Pakistan’s economy to expand 0.5 percent to 1.5 percent in the current fiscal year. The SBP projects the economic growth at 1.5- 2.5 percent for this fiscal year. “I don’t expect any change in the policy rate. The SBP has to balance risk of rising inflation with Covid and keep the economy running,” said Samiullah Tariq, head of research at Pak-Kuwait Investment Company.

Faizan Ahmed, head of research at BMA Capital, said the SBP was very clear in its forward guidance provided in the last MPC, so the rates were likely to remain intact at 7.0 percent in this month's MPC.

“Rising inflation, however, does pose a challenge but it will be important to see how SBP assesses the nature of recent spike in commodities and risk of faster increases in NFNE (non-food non-energy) in the current environment.

He said fresh round of Covid-related lockdowns add to the complication as NFNE had so far remained benign during the periods of lockdown.

Depending on commodity prices, the inflation in FY2021 could exceed 9.0 percent year-on-year, above the upper level of the SBP's inflation range of 7-9 percent, he said.

“The question is not whether SBP will increase the rates or not as monetary adjustment was inevitable to restore real rates into positive territory. More pertinent question is when will the interest rates start increasing?” Ahmed said.

“Looking at current data, the first rate hike may be in May 2021 and I expect the hikes to be gradual as affirmed by the SBP in its last MPC,” he said and added, “So, a 50 bps increase in May followed by 50 bps increase in each successive MPC until December seems likely”.

“This adds to a cumulative increase of 200 bps in 2021 and will take policy rate to 9.0 percent, translating into a real rate of 1.5-0.5 percent based on FY2022 inflation projection of 7.5-8.5 percent,” Ahmed said.

In a client note Taurus Securities expects no change to a 25 bps hike in the benchmark policy rate, based on the inflationary pressures and resumption of the IMF programme.

The National Consumer Price Index for February clocked-in at 8.70 percent YoY and is expected to hover above 9 percent for March as well, according to recent estimates.