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Sunday May 22, 2022

‘SBP may hold rate this time but hike not far away’

Markets are also watching how the SBP sees the impact of the ongoing fifth wave caused by the Omicron variant on the economic outlook.

January 21, 2022
The six-month Karachi interbank offered rate has been stable on better forward guidance. -SBP logo/File
The six-month Karachi interbank offered rate has been stable on better forward guidance. -SBP logo/File

KARACHI: The State Bank of Pakistan (SBP) is likely to keep its benchmark policy rate unchanged next week, although analysts expect rate increases in the coming months as inflationary and external account pressures mount amid a surge in global commodity prices.

The SBP raised the policy rate by 100 basis points to 9.75 percent last month to counter double-digit inflation, falling rupee and the large current account deficit. It has hiked interest rates by 275 basis points since September 2021.

The central bank increased the interest rate in December, and would now likely wait and review the economic recovery position and sustainability, before taking a decision on raising borrowing costs in March.

Markets are also watching how the SBP sees the impact of the ongoing fifth wave caused by the Omicron variant on the economic outlook.

In its last monetary policy statement, the SBP said, “MPC (Monetary Policy Committee) felt that the end goal of mildly positive real interest rates on a forward-looking basis was now close to being achieved.”

The SBP governor Dr Reza Baqir, in an interview with Bloomberg, also said, “We are going to take a pause to first look at the effects of the tightening we have already done then we will consider what monetary policy settings should be.”

Fahad Rauf, the head of research at Ismail Iqbal Securities said the policy rate would stay the same. “Major reason is SBP's reputation. We have seen a series of 63 Day OMOs (open market operations) and regular comments by SBP officials that rates would stay flat. Otherwise the economic indicators have not improved, which could lead to a rate hike in March.”

After introducing 63 Day OMO injection, the SBP has injected around Rs1.8 trillion in the banking system. Total size of OMO is R2.1 trillion.

The six-month Karachi interbank offered rate has been stable on better forward guidance.

The SBP’s governor on many occasions said the global developments, including recoveries around the world and supply chain disruptions, have caused a sharp spike in global commodity prices, which has pushed up Pakistan’s current account deficit as well as inflation. However, he is optimistic that the country has capacity to sustain the balance of payments pressures fuelled by commodity spikes.

“But as central banks begin to turn hawkish, it is going to moderate global demand growth; that in turn is what is going to bring down international commodity prices,” Baqir said in an interview with Reuters last week.

The consumer price index inflation increased to 12.28 percent in December from a year earlier, above the SBP’s upwardly revised 9-11 percent forecast for this fiscal year.

The country’s trade deficit surged by a sharp 106.4 percent to $25.478 billion in July-December FY2022, given a hefty increase in imports, compared with exports.

Samiullah Tariq, the research head at Pak-Kuwait Investment Company also sees no change in the upcoming policy. “If commodity prices continue to rise, then we may see a 50bps hike in March,” he said.

Analysts at Topline Research expect CPI inflation in FY2022 to remain at around 11 percent. They believe a future rise of 50-100bps till June 2022 is likely.

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