SBP likely to hold rate as Delta variant tightens grip

KARACHI: State Bank of Pakistan (SBP) is expected to leave its benchmark interest rate unchanged next week for its sixth straight monetary policy meeting to support economy as the Delta variant of Covid-19 tightens its grip on the country.

A majority of analysts surveyed by The News believe the SBP’s Monetary Policy Committee (MPC) will hold the policy rate steady at 7 percent when the decision is announced on July 27 (Tuesday).

Any reversal in the central bank’s accommodative monetary policy stance is to be unlikely at least for the next two months, especially with growth uncertainties rising again due to resurgence in the Covid cases, and the low level of vaccination.

The onset of the fourth wave could threaten the outlook for the country’s economic recovery.

Some analysts see a rate hike around late 2021, while others expect an increase early next year.

“Expect interest rates to remain unchanged for now. This is because of pro-growth policies of the government and possibility of resurgence of Covid and accompanied lockdowns. Both of these reasons will likely lead State Bank to maintain the status quo in its upcoming monetary policy review,” said Saad Hashemy, an executive director at BMA Capital.

Pakistan is facing a spike in cases after a significant decline in May and June, with a large number of positive tests recorded in the city of Karachi, depicting the presence of the Delta variant.

Sindh government again imposed pandemic-linked restrictions as the situation became alarming in the capital of the province.

Analysts and the markets are also looking to the central bank for how it will respond to the risks of increasing inflationary pressures and exacerbating current account deficit.

“In my view, interest rates would remain constant at current levels, as SBP has to balance risks like CAD [current account deficit] and inflation, with Covid impact on domestic and global economy,” said Samiullah Tariq, the head of research at Pak-Kuwait Investment Company.

Consumer price Index (CPI) inflation hit 8.9 percent in the last fiscal year of 2020/21, within the SBP’s announced range of 7-9 percent. Inflation was 10.74 percent in the previous year.

In the last monetary policy statement in May, the SBP expected inflation

to gradually fall toward the 5-7 percent target range over the medium-term. However, an ongoing rising trend in international commodity prices, upward adjustment in the utility tariffs and wage pressures to further feed into inflation, said the central bank's third quarterly report on the State of Pakistan’s Economy for FY2021.

“On the monetary policy side, in the near term, the need to sustain economic momentum will take precedence over weakening trade balance and negative real rates,” said a report issued by Alfalah Securities.

“However, current interest rates cannot be upheld for long, amidst resurging commodity prices and a widening import-export balance.

We believe SBP will wait and see the Covid situation and delay tightening till September 2021.”

The government has set an economic growth target of 4.8 percent in FY2022, compared with 3.9 percent in FY2021. Inflation target is fixed at 8.2 percent.

The current account is expected in the range of $7-8 billion or 2.2-2.6 percent of gross domestic product this fiscal year, according to analysts.