All eyes on SBP as uptight investors seek clues on monetary stance

KARACHI: All eyes are riveted to central bank’s monetary policy meeting next week as investors in money and secondary markets are desperate for clues on the interest rate outlook amid strong expectations of a 100 basis points (bps) hike.

Any aggressively monetary tightening by State Bank of Pakistan’s (SBPs) could cause the the cut-off yields on Market Treasury Bills (T-bills) and Pakistan Investment Bonds (PIBs) to shoot up, according to analysts.

The cut-off yields on PIBs and T-bills increased by 200-300 bps following a 150 bps hike in the policy rate by the central bank on November 19. The policy rate hovers at 8.75 percent.

Besides, the six-month Karachi interbank offered rate (KIBOR) has also increased by 239 bps to 11.55 percent.

In the T-bill auction on December 1 the government raised over Rs500 billion at a much higher rate than their previous auction in which it accepted much lower bids.

“This will be a key event before the upcoming crucial T-bill auction scheduled on Dec 15, 2021 and PIB auction scheduled on Dec 22, 2021 as it will give direction to the market on interest rates outlook,” said a report by Topline Securities. It will also be interesting to assess the result of these upcoming auctions as Shaukat Tarin, Advisor on Finance and Revenue, had recently stated in an interview that banks misused the auction window to bid at higher rates. He further stated that the government also had other options to use if the banks did not mend their ways.

It is important to note that in the next scheduled T-bill auction on December 15, a huge maturity of T-bill of Rs1.5 trillion is due where the government is targeting to raise Rs1.4 trillion from the said auction. Similarly, from the PIB auction, the government is planning to raise Rs100 billion against maturity of Rs37 billion. Another T-bill auction is due before year-end (December 29, 2021), where there is maturity of Rs1.1 trillion and the government is anticipated to raise Rs1.2 trillion.

“This MPS [monetary policy statement] will be the first after Pakistan reached a staff level agreement with the IMF for sixth review on November 22. Pakistan has to meet certain preconditions before the IMF (International Monetary Fund) board gives final approval for disbursement of $1 billion,” the Topline analysts added.

“Hence, many believe that an increase in policy rate in upcoming MPS cannot be ruled out.”

here is a clear shift in expectations, with money managers having a more hawkish stance this time, according to a survey conducted by Ismail Iqbal Securities to assess how key market participants view monetary settings in near term.

About 70 percent of the market participants expect an interest rate hike of 100 bps or above in the upcoming monetary policy meeting as compared to 40 percent in survey before the November meeting, the current survey shows.

Around 63 percent of the market participants expected the policy rate to reach 10-11 percent by June 2022 as compared to only 11 percent in the previous survey, while about 80 percent expected it to remain 10 percent or below, as per the findings of the study.

Moreover, about 50 percent of the market participants expect inflation to average between 10-11 percent during FY2022 as compared to 34 percent in the previous survey.

About 30 percent expect inflation to average between 11-12 percent versus only 10 percent in the previous survey. “This implies that the market is expecting inflation at 11-13 percent for the remaining seven months,” it added.