Analysts forecast 100bps increase in policy rate

Analysts forecast 100bps increase in policy rate

KARACHI: The State Bank of Pakistan (SBP) is scheduled to announce its monetary policy on July 16, 2019 (Tuesday) and analysts forecast central bank may increase key policy rate by another 100 basis points.

Analysts at Arif Habib Limited said that the central bank to increase its policy rate by 100bps to 13.25 percent.

“Primary reason for this increase in policy rate, in our view, is to keep Real Interest Rates positive in light of rising inflation during 1QFY20 on the back of increase in the prices of administered utilities (electricity and gas).”

Average inflation for 1QFY20 is expected to settle at 12.11 percent, while a policy rate of 12.25 percent would imply a real interest rate of just 14bps.

The data for the past 48 months exhibits that average real interest rates have remained approx. 2.3 percent, while under the last IMF program (September 2013 to September 2016) real interest rates hovered at an average of 3.1 percent.

Therefore, it seems unlikely that the central bank would let the real interest rates go negative or below one percent. The staff report document also states that real interest rates would be kept positive to counter inflation.

On the external front, persistent Current Account Deficit continues to weigh in on the economy despite a substantial decline in imports.

For May 2019, CAD has declined by 47 percent YoY to USD1.1 billion. However, in terms of GDP it is still high at 5 percent.

Therefore, in order to reduce this deficit to a sustainable level, the SBP is expected to increase its policy rate to compress demand further.

In addition, with the advent of market determined exchange rate, a persistent Current Account Deficit might result in further weakness in exchange rate which might induce further inflation.