SBP to keep policy rate on hold for now, hike next year: analysts

Erum Zaidi
Tuesday, Sep 14, 2021

KARACHI: The central bank is seen keeping its policy rate on hold next week despite the rupee hitting record lows, and is expected to start monetary tightening by the first quarter of next year, analysts said on Monday.

The State Bank of Pakistan's Monetary Policy Committee (MPC) maintained the policy rate at 7 percent in July to support the economic recovery. The MPC is scheduled to announce its monetary policy decision on September 20.

“In my view SBP would continue to hold policy rate as it needs to balance the negative impact of Covid-19 with lower interest rates,” said Samiullah Tariq, the head of research at Pak-Kuwait Investment Company.

"I think the monetary policy would be tightened after January 2022.” The pro-growth policies of the government are seen as a major consideration for the MPC to hold the policy rate this year. However, at the same time, the increasing inflationary pressures and widening the current account deficit are also mounting pressure on the MPC to hike rates sooner rather than later.

“We expect no change in interest rates. Inflation and current account situation appear manageable,” said Mustafa Mustansir, the head of research at Taurus Securities. “Visible signs of demand-side pressure still quite weak.”

Mustansirsaid lower interest rates are conducive to growth and "the growth is the government’s focus at this point". In its last forward guidance, the MPC said it expects the monetary policy to remain accommodative in the near term, and any adjustments in the policy rate to be measured and gradual to achieve mildly positive real interest rates over time.

If signs emerge of demand-led pressure on inflation or of vulnerabilities in the current account, the MPC noted that it would be prudent for monetary policy to begin to normalize through a gradual reduction in the degree of accommodation, it added.

A poll conducted by brokerage Topline Research showed that most financial market participants expect a status quo in the September policy. About 65 percent of the participants are expecting no change in the policy rate in the upcoming monetary policy statement, compared with 89 percent in the previous poll, it said.

Almost 25 percent of the participants expect an increase of 25 basis points (bps) in the policy rate, while 10 percent of the participants anticipate an increase of 50 bps or above. None of the participants expect a cut in the policy rate, according to the poll.

“We expect a 25 bps increase in the policy rate in September 2021 MPS, given the recent vulnerabilities in the current account, higher-than-expected SPI [sensitive price index] readings suggesting no let down in CPI [consumer price index] inflation and the start of discussions with the IMF on resumption of the programme,” said an analyst at Topline Securities.

Another monetary policy survey conducted by Policy Research Unit (PRU), Policy Advisory Board of the Federation of Pakistan Chamber of Commerce and Industry (FPCCI) recommended a reduction in the policy rate by 50-100 bps.

The survey results showed that 84 percent of the businessmen and researchers suggest that there should be no increase in the policy rate and nearly half of them suggest a cut between 50-100 bps.

The policy brief issued on the occasion has noted with a sigh of relief that the core inflation in Pakistan – the most definitive indicator for setting up the policy rate for any central bank – has significantly subsided to 6.3 percent in August, compared with 6.9 percent in the previous month.

Mian Nasser Hyatt Maggo, President FPCCI said that the policy interest rate must not be over 6 percent and if the SBP wants to promote business activities and economic growth in the country, it should be brought down to 5 percent. He also pointed out that interest rate in the region is 3-4 percent only and we have to compete with the region.