Monday Jan 23 2023

SBP expected to raise rates by 100-200bps today to tame surging inflation

An undated image of the State Bank of Pakistans plague. — Reuters/File
An undated image of the State Bank of Pakistan's plague. — Reuters/File

  • SBP governor will announce policy rate in a press conference.
  • Topline Research's survey shows market expects 100-200bps rise.
  • SBP raised interest rate by 100bps in November 2022 to 16%.

The State Bank of Pakistan (SBP) looks set to raise its key policy rate at its review today (Monday), as it attempts to tackle surging inflation which hit 24.5% in December 2022.

Pakistan is wrestling with economic turmoil, a fall in reserves and a weakening currency which makes it crystal clear that the central bank is preparing to increase the benchmark interest rate in its first Monetary Policy Committee meeting of the calendar year 2023, but how big the hike will be remains a tricky question till the official announcement is made by SBP Governor Jameel Ahmad.

The central bank raised the benchmark interest rate by 100 basis points (bps) in November last year to 16% — the highest since 1999 — taking the total increase to 900 bps since September 2021 to counter rising inflation.

A survey conducted by Topline Research showed that the market expects an increase of 100 to 200bps in the interest rate. The majority of participants expect (74%) a 100-200bps hike, out of these 37% think it would be 100bps, 18% see 150bps and 19% put it at 200bps.

Among the remaining participants, 2% expects a hike of more than 200bps, 5% anticipate 50bps increase whereas 18% are eyeing no change and only 2% expect a rate cut.

On the external front, challenges continue to mount as SBP’s foreign exchange reserves dropped to $4.56 billion is due to huge debt repayments and a slowdown in inflows.

“We think that the policy rate will increase by 100bps however if the inflation rate does not fall and external issues persist, further rate hikes cannot be ruled out,” said Topline Research.

Since last monetary policy statement on November 25, 2022, the urban core inflation (non-food and non-energy) stood at 14.7% in December 2022 compared to 14.6% in November. 

Meanwhile the rural core inflation increased to 19% las month as compared to 18.5% in November. The increase in core inflation will also be a major concern for the central bank.

With Pakistan trying a convince the International Monetary Fund (IMF) to complete the ninth review — which is pending since September 2022 — of the much-awaited bailout package and as the country agreed on some tough economic policy adjustments to lure the Washington-based lender, the SBP’s decision is being closely watched.