SBP calls policy meeting earlier; strong action likely

KARACHI: The State Bank of Pakistan (SBP) on Tuesday called the monetary policy meeting a week in advance to take strong policy action, as weakening rupee and runaway inflation threaten the country’s fragile economic recovery.

The meeting has been brought forward in light of recent unforeseen developments that have affected the outlook for inflation and the balance of payments, and to help reduce the uncertainty about monetary settings prevailing in the market, a statement said on Tuesday.

The Monetary Policy Committee (MPC) of the SBP has decided to bring forward its next meeting from the previously announced date of November 26, 2021. The MPC would now be convened in SBP Karachi on Friday, November 19, 2021.

“The MPC will take stock of these developments and decide about monetary policy,” the statement added.

Analysts expect the SBP to take strong policy action amid heightened concerns about the inflation outlook and external sector.

SBP interest rate hike would likely be more than previously forecast due to surging inflation, as spike in local energy prices and high international commodity prices pose a challenge and threaten to upend the SBP’s current consumer price index (CPI) forecast of 7-9 percent for the current 2021/22 fiscal year.

The SBP was also expected to release new economic forecasts, especially about inflation and the current account deficit.

CPI inflation rose to 9.2 percent year-on-year in October from 9 percent in the previous month.

The pressure on the exchange rate caused by delay in the International Monetary Fund bailout programme, which led to speculative trade in the foreign exchange market, could also compel the MPC to make a sharp move in the policy rate in Friday’s meeting.

Some analysts believe the government and the SBP seem to be taking unpopular decisions on power, gas, petrol and the monetary policy to appease the IMF and to get its nod.

“Early announcement is to provide clarity as there is uncertainty causing panic across all the financial markets. In addition, the recent developments on the external front as well as inflation require some policy actions,” said Tahir Abbas, head of research at Arif Habib Limited. “Therefore, we see a hike of 75-100 basis points in this policy.”

The SBP raised the policy rate by 25 basis points to 7.25 percent in September.

It seeks to end uncertainty and wants to show the markets that it is going to pre-emptively address the challenges with regard to price stability and the balance of payments.

In its last forward guidance on the monetary policy, the SBP said looking ahead, in the absence of unforeseen circumstances, the MPC expects monetary policy to remain accommodative in the near-term, with possible further gradual tapering of stimulus to achieve mildly positive real interest rates over time.

The pace of this possible further gradual tapering would be informed by updated information on the continued strength of demand growth and the stance of fiscal policy, amongst other factors.

It also said the robust recovery in domestic demand, coupled with higher international commodity prices, is leading to a strong pick-up in imports and a rise in the current account deficit.

While year-on-year inflation has declined since June, rising demand pressures together with higher imported inflation could begin to manifest in inflation readings later in the fiscal year.

“Looking ahead, the inflation outlook largely depends on the path of domestic demand and administered prices, notably fuel and electricity, as well as global commodity prices,” it added.

The MPC would continue to carefully monitor developments affecting medium-term prospects for inflation, financial stability, and growth and stands ready to respond appropriately, it said.

“I think SBP wants to calm markets and revive investor confidence. Our expectation is that at least 100bps increase in interest rates,” said Mustafa Mustansir, the head of research at Taurus Securities Limited.

Last week, the SBP raised the cash reserve requirement (CRR) by 1 percent for banks. This monetary tool is not frequently used in Pakistan as SBP frequently uses its policy rate to tighten or loosen monetary policy.

The average CRR to be maintained during a period of two weeks by scheduled banks, has been increased from 5 percent to 6 percent and minimum CRR to be maintained each day from 3 percent to 4 percent.