SBP to raise interest rate and some predict a jumbo hike

Erum Zaidi
Saturday, May 21, 2022

KARACHI: The State Bank of Pakistan (SBP) is likely to further tighten its policy settings at its review next week to fight runaway inflation and help the battered rupee, analysts said on Friday.

The market awaits the outcome of SBP’s May 23 meeting for clues on its policy trajectory after a deterioration in the outlook for inflation an increase in risks to external stability, as well as domestic political uncertainty.

The SBP raised its policy rate by 250 basis points to 12.25 percent in an emergency meeting, the biggest hike in years, held in April.

“Given concerns along with rising inflation and weakening currency, we anticipate SBP to raise the policy rate by 100 bps [basis points],” said an analyst at Topline Securitas in a report.

“Since the last Monetary Policy Statement in April, secondary market rates including T-Bill/KIBOR rates have gone up by around 200 bps due to uncertainty on removal of subsidies on petrol/diesel and continuation of the IMF programme.”

Treasury bills cut-off yields, however declined for the first time after almost a year in the lastest auction held May 19, declining by 5-29 bps with three, six and 12 months’ T-Bill yields clocking in at 14.49 percent, 14.70 percent, and 14.75 percent respectively.

Topline Research conducted a poll from leading fund managers to assess their views on the country's economic outlook.

As per the survey results, around 54 percent of the participants expected an increase of 100 bps, 14 percent of the participants anticipated an increase of 150 bps and 11 percent expected an increase of 200 bps or more.

On the other hand, only 13 percent participants expect an increase of 50bps while 9 percent expect no change.

Pakistan is currently facing tough economic times as depleting foreign exchange reserves, rising fiscal deficit amid huge petrol and diesel subsidy and indecisiveness by the new government on key economic measures is exacerbating economic issues.

“It will be key for the government to take the required reform steps including removal of subsidy on petrol/diesel, measures to curb imports & improve tax collection. This will pave the way for the resumption of the IMF programme which currently remains stalled and will result in dollar flows that could ease pressure on currency and foreign exchange reserves going forward,” the analyst noted.

Inflation is likely to increase further in coming months. The rupee has lost 9.8 percent in the last two months, breaching the 200 level to the dollar on Friday. With import cover of less than two months and delays in the IMF bailout, the rupee has faced significant pressure.

The weakening rupee along with record high fiscal slippages are likely to increase consumer price index (CPI) inflation to 15-16 percent, making a strong case for at least 100 bps hike in interest rates.

“This is in addition to the 525 bps increase in policy rate already taken by the SBP since September 2021,” another analyst said.

Data released from Pakistan Bureau of Statistics two weeks ago showed CPI inflation reached a two-year high of 13.37 percent in April 2022, compared with the same month a year ago, and was 1.6 percent higher than the previous month. The SBP expects the inflation to average between 9-11 percent this fiscal year.