Monetary policy: SBP likely to maintain status quo in interest rate today

• Market talks suggests that policy rate will remain unchanged at 9.75% for next one month.
• SBP had increased policy rate by a cumulative 275bps from Sept to Dec 2021 to 9.75%.
• Today’s MPC meeting is first after start of Ukraine-Russia conflict.

KARACHI: The State Bank of Pakistan (SBP) is scheduled to meet today (March 8) to assess developments on the economic front and announce its monetary policy.

Conflicting movements in economic indicators suggest the worst is not yet over, but the market has developed a consensus that the policy rate will remain unchanged at 9.75% for the next one month.

The likely no change in the rate does not mean the recent cycle of a rate hike has come to an end, but most of the experts say there is still room for another hike of 50-100 basis points (bps) later.

The interest rate and flexible rupee-dollar parity are the two major tools available with central banks all over the world to control inflation reading and give a direction to the economic trajectory in their respective countries.

The central bank had increased the key policy rate by a cumulative 275bps from September to December 2021 to 9.75% to control the rising inflation and narrow the widening current account deficit, while economic activities remain healthy.

Today’s Monetary Policy Committee (MPC) meeting is the first after the start of the Ukraine-Russia conflict which is posing a threat to the economy.

A question arises if economic indicators and the geopolitical situation continue to worsen despite the recent policy rate hikes and other measures, then why the central bank is likely to take a pause instead of increasing the rate today.

There are a couple of answers to the question. One is that the central bank has indicated in its monetary policy statement’s (MPS) forward guidance that it will hold the key interest rate steady in March.

In the last MPS forward guidance released on January 24, the central banks had mentioned that “current real interest rates on a forward-looking basis are appropriate to guide inflation to the medium-term range of 5-7%, support growth and maintain external stability. If future data outturns require a fine-tuning of monetary policy settings, MPC expected that any change would be relatively modest.”

However, some analysts believe that since the last MPS, major developments have taken place and new data is now available which will likely be considered by the central bank in the upcoming MPS.

The Russia-Ukraine situation has completely changed the commodity landscape, with crude oil up by 50%, coal up 140%, and wheat up 57% since the last MPC. 

In its interest rate forecast, Topline securities stated: "We believe, though commodity prices recently have risen sharply but keeping in view SBP’s focus to sustain economic recovery and its last forward-looking guidance, we anticipate no change in upcoming MPS.”

“The decision to not increase petroleum prices till June 2022 may also provide some cushion to the inflation outlook,” it said.

However, the brokerage house added that a rate hike can be expected in the next meeting scheduled to be held on April 19.

“We expect some changes in forwarding guidance considering rising commodity prices and other recent developments,” it said.