Key policy rate may up by 100bps in hawkish stance State Bank of Pakistan

Key policy rate may up by 100bps in hawkish stance

KARACHI: The State Bank of Pakistan (SBP) is set to announce monetary policy on November 19, 2021 and analysts believe the central bank may remain hawkish.

Analysts at Arif Habib Limited said that the monetary policy committee of SBP will convene on Friday, November 19, 2021 to announce the monetary policy for the next two months.

The analysts expect that SBP to remain hawkish, raising its policy rate for the second time since the beginning of the current fiscal year 2021/2022 and at a much higher magnitude of 100 basis points – the highest hike in almost 2.3 years – taking the total cumulative increase in FY22TD to 125bps. With this, the revised policy rate is expected at 8.25 per cent.

To recall, the SBP, continuing with its tightening policy, recently announced a 100bps hike in Cash Reserve Requirement too.

A shift towards ‘a more hawkish stance’ from the earlier ‘gradual and calibrated’ might be evident in this monetary policy meeting as inflation worries are rumbling more clearly than before.

Inflation in Pakistan has increased markedly with the resumption of economic activities – but as supply-side inflation has subsided, demand-side inflation has overshot.

Headline inflation initially remained low averaging at 8.7 per cent during the first four months of the fiscal year 2021/2022, but now with waning base effect, it has started accelerating, raising concerns.

Clearly, the inflationary pressures reflect the upside arising in global energy and commodity prices and moreover, do not look ready to subside anytime soon.

We have seen some of the central banks in the regional markets reacting as consumer prices are being pressured by global supply-chain disruptions and costlier energy and food supplies.

Domestically, there has been a positive development on the COVID front, in terms of reduced infections/deaths and faster vaccinations.

The overall improved healthcare conditions coupled with the economic performance of high-frequency indicators (such as auto and cement sales) as well as LSM numbers (2MFY22: +7.3% YoY) evidently signal that the overall economic activity is on the cusp of a strengthening revival.

The domestic recovery that is likely to push GDP growth higher than initially anticipated is adding to inflationary pressures and thus, the prudent policy approach for the SBP would be to tack in a more hawkish path to manage these risks.

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