State Bank likely to maintain status quo on policy rates

Erum Zaidi

KARACHI: State Bank of Pakistan (SBP) is likely to keep policy rates on hold at its bimonthly monetary policy meeting this weekend on soft inflation outlook, but pressure on the external sector might raise the prospects of a hike in 2018, analysts said on Wednesday.

“We expect the central bank to maintain the status quo with the policy rate at 5.75 percent in July. However, we reiterate our view that --faced with a deteriorating external account-- it may have to start hiking sooner than warranted by inflation readings,” said Bilal Khan, a senior economist at Standard Chartered Bank.

“We note that at the May Monetary Policy Committee (MPC) meeting, the decision to hold rate was unanimous, compared to a minority of members voting for a further 25 basis points cut previously,” he added.

Many analysts agree that policy rate will stay steady for a while and are not rushed to revise their expectations as far as the July monetary policy is concerned.

“There is little doubt that the MPC will change its prevailing stance on the monetary policy as inflation looks close to the target,” said an analyst, requesting anonymity.

Moreover, the MPC seems continuing supporting current upward growth trajectory. Analysts expect July inflation to stay around 3 percent.

“The 0.16 percent month-on-month decline in food and non-alcoholic beverages index (34.83pc weight) in July-17, compared to a 2.68 percent monthly increase in the previous year, should drag inflation to a 20 month low this month,” said an analyst at Alfalah Securities.

“Overall, looking at our July and July to Aug-17 inflation expectation of 3.0/3.53 percent, we see rate hike in the September monetary policy statement as a far cry.”

He added the real interest rate (policy rate – inflation) were expected to average around 2.22 percent over the next two months, creating sizable room for the SBP to maintain discount rate.

“That said, we maintain our 50bps rate increase expectation in first half of 2018,” he said. Consumer price index inflation softened to 3.9 percent in June from five percent in the previous month.

Some analysts believe a weakening balance of payments could pose a headache for the newly-appointed SBP’s governor and the MPC in future. “They might have to formulate their strategy in the most of extreme circumstances,” another expert warned.

The SBP reported a 148.5 percent increase in current account deficit for the full 2016/17 fiscal year. The deficit sharply widened to $12.098 billion from $4.867 billion a year earlier. However, a conventional wisdom among some analysts is that the policymakers are unlikely to act before the general elections next year to stimulate the economy.        

Originally published in The News