SBP likely to hold policy rate at 22% after ease in inflation

• No change expected at forthcoming policy review meeting.
• 70% participants expect policy rate to remain unchanged.
• Rate remains on hold since July 2023.

KARACHI: The State Bank of Pakistan's key interest rate is likely to remain unchanged this month at 22%, as inflation eases due to a reduction in fuel prices and a strengthened rupee, The News reported quoting a brokerage poll on Friday.

In its bid to control rising inflation in the country and support external balance, the SBP increased its policy rate by a cumulative 1,500 basis points since October 2021. The rate has, however, remained on hold since July 2023.

A survey of analysts and financial market participants by brokerage Topline Securities expected no change in the benchmark rate at the forthcoming policy review meeting, scheduled for October 30.

"At least 70% of participants expect the policy rate to remain unchanged at 22%. While 16% of participants expect the policy rate to down by 25bps to 100bps and 11% of participants expect it to down by more than 100bps," said Topline Securities, citing its poll.

"We also believe the SBP will keep the policy rate unchanged at 22% in the upcoming meeting." Many analysts foresee the SBP is done hiking rates and will stay on hold until at least March 2024.

There have been new developments since the last meeting of the Monetary Policy Committee (MPC) of the SBP held on September 14. These will probably be discussed by the MPC in an upcoming meeting.

These include the sharp decline in Pakistan's current account deficit from $164 million in August to $8 million in September, the average 11% drop in local fuel prices (diesel and petrol), the stability of international oil prices at roughly $90 per barrel, and the 7% increase in the rupee against the US dollar.

Cut-off yields in the most recent T-Bill auction have decreased by 30-45 basis points (bps) based on an anticipated fall in inflation. Currently, the cut-off yields for three, six, and twelve months are 22.2%, 22.39%, and 22.4%, respectively.

In addition, since September 14, secondary market yields on three-year Pakistan Investment Bonds and six-month T-Bills have decreased by 280 basis points and 239 basis points, respectively.

The stabilisation measures have started yielding results. Inflation has come down to 31.4% in September 2023 after peaking at 38% in May 2023 and is expected to continue its downward trajectory over the coming months, whereas the external account has improved considerably and foreign exchange buffers are being built up, according to the SBP's statement issued last week.

The SBP assesses the real interest rates turning substantially positive on a forward-looking basis, as inflation is expected to come down significantly during the second half of this fiscal year.