Investors pare rate hike bets on political stability

KARACHI: Investors reduced bets for any further interest rate hike in the upcoming monetary policy meeting amid a big 250 basis points raise earlier this month and on hopes of political stability in the country after opposition formed a coalition government.

The rate hike was one of the biggest since 1996.

The SBP on Saturday updated its schedule for the monetary policy meetings, saying the next rate sitting meeting will be on May 23.

“In light of the emergency Monetary Policy meeting held on April 7, 2022, the next regular meeting of the MPC is now scheduled for May 23rd, 2022,” the SBP said in a statement.

The central bank raised the policy rate to 12.25 percent on April 07 after it held an emergency meeting due to increasing risk to inflation and the external sector stability. The SBP also took further actions to reduce pressures on inflation, rupee and the current account. It imposed 100 percent cash margins on 177. The SBP increased the interest rate on the export refinance scheme.

The SBP said it took aggressive policy action to ensure stability in the financial markets threatened by political uncertainty and deteriorating economy. Former prime minister Imran Khan’s attempt to avoid the opposition move to oust him through a no-confidence move by dissolving parliament threw the country into full-blown political crises.

Analysts expect the Monetary Policy Committee (MPC) will need more time to elevate the impact of a sharp increase in the interest rates on inflation, currency and the balance of payments.

"It is unlikely for interest rates to increase in May given the large increase in recent emergency meeting,” said Saad Hashemy, an executive director at BMA Capital. “Also, the focus of the government is on combating inflation specifically essential items which have a significant weight in the inflation index."

But the upcoming monetary policy decision would be interesting as the markets and the analysts would watch how the SBP takes its stance in the new setup in Islamabad and when new government starts negotiations with the IMF to resume $6 billion loan programme.

The Prime Minister Shebaz Sharif has decided not to roll back fuel subsidies for the time being despite pressure on public funds. He also kept petroleum products prices unchanged. However, the government jacked up electricity tariffs by Rs4.8 per unit.

“This time it is very difficult to predict what the upcoming monetary policy decision would be as the big rate hike has been done and its impacts will start coming over the next few weeks,” said Abdul Rehman Siddiqui, the deputy head of research at BMA Capital Management Limited.

Analysts said inflation usually is on a rise during the month of Ramazan. Only post Ramazan inflation readings will need to be taken into account for any policy decision.

“If oil prices remain the same and its impact is visible on food inflation then there will be a need for a minor raise in the policy rate, but requirement has already been met by raising 250bps in one go during the last meeting,” Siddiqui said.

In line with the advance half-yearly calendar that the SBP has been announcing on a rolling basis since May 2021, the schedule for MPC meetings during the rest of calendar year 2022 is envisaged as follows:

The SBP will hold a next meeting on July 7 (Thursday), then on August 22 (Monday) and October 10 (Monday). The last meeting of 2022 will be held on November 25 (Friday).

“The advance calendar of MPC meetings for the first half of calendar year 2023 will be shared at the time of the November 2022 MPC meeting,” the bank said.