Pakistan may see further 100bps hike in policy rate State Bank of Pakistan

Pakistan may see further 100bps hike in policy rate

KARACHI: Pakistan central bank is scheduled to review policy rate on July 07, 2022 and analysts believed an increase of up to 100 basis points due to surge in inflation.

A report of K Trade Research issued on Tuesday, stated that the State Bank of Pakistan (SBP) scheduled its monetary policy meeting for July 07, 2022 to set policy rates for the next six weeks.

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“Given the recent inflationary wave, we anticipate another 75-100 basis points hike in the policy rate to 14.5-14.75 per cent,” according to the analysts.

The SBP in its monetary policy announcements on April 7, 2022 and May 23, 2022 has already increase policy rate by 250 basis points and 150 basis points, respectively. The central bank increased the policy rate by 400 basis points from 9.75 per cent to 13.75 per cent in just last two announcements.

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Inflation for June 2022 touched 13-year high levels of 21.3 per cent, driven by the reversal of petroleum and electricity subsidies. Real interest rates for the month fell to nearly -8.0 per cent from 0 per cent in May 2022.

Moreover, core Non-Food Non-Energy (NFNE) inflation has entered double-digits (12.3 per cent in Jun 2022), indicating strong underlying demand in the economy.

The analysts project inflation to average around 16.0 per cent in current fiscal eyar 2022/2023, given the re-implementation of taxes in the petroleum pricing structure.

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Moreover, elevated prices of both RLNG and Coal will further push electricity prices to higher levels. Notably, electricity production cost from imported coal (20 per cent of power mix) is up nearly 4x YoY, and electricity production cost from RLNG (20 per cent of power mix) is up 2.5x YoY.

On a forward-looking basis, we estimate real interest rates stand at -2.3 per cent, strengthening our case for another policy rate hike.

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External imbalances remain elevated as the trade deficit for Jun 2022 stood at USD 4.8 billion, driven by elevated energy and commodity prices. Moreover, material concerns have arisen over the potential sustainability of exports, given the economic slowdown in key markets. Notably, textile players are anticipating a 15-20 per cent reduction in volumetric export off-take in 2022/2023, potentially exacerbating the external imbalances.

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The analysts believe a tight monetary stance over the medium is necessary to ensure Pakistan’s economy weathers the global inflationary wave and the ensuing external and fiscal imbalances.

The short tenor secondary market yields have crossed 15.0 per cent and the 3-month treasury-bill cut-off yields touched 15.23 per cent in the latest auction, hinting at market expectations of another hike.