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State Bank of Pakistan

SBP likely keep policy rate unchanged at 7 percent: market poll

KARACHI: The financial market is expecting that the central bank may keep policy rate unchanged at 7 percent in its monetary policy announcement scheduled for January 22, 2021.

According to a poll conducted by Topline Securities, about 75 percent of financial market participants are expecting the State Bank of Pakistan (SBP) would keep the policy rate unchanged.

A total of 94 participants took part in the latest poll, compared to 72 in November 2020 poll which was conducted for November 2020 Monetary Policy Statement (MPS).

Of the 94 participants, 75 percent expect no change in the policy rate in the January 22, 2021 MPS. Around 88 percent expected no change in November 2020 poll.

About 19 percent of the participants are expecting increase in the policy rate. About 10 percent are expecting increase of 100-150bps. In last the poll, only 7 percent of the participants were expecting an increase in the policy rate.

With respect to monetary tightening in 2021, 58 percent of the participants expect monetary tightening to begin in 1H2021 (12 percent in January, 21 percent in March and 25 percent in May). About 26 percent expect monetary tightening to begin in 2H2021, while 17 percent do not anticipate a rate hike in 2021.

The analysts at the Topline Securities are also expecting no change in the policy rate in the January 2021 MPS, while they expect increase in policy rate by 100 basis points in May/July 2021. 

The analysts believe change in views towards increase in the policy rate of the participants is owing to (1) likely restoration of IMF program over next couple of weeks wherein energy tariffs are likely to be adjusted upwards and (2) rising international oil and commodity prices (sugar, scrap, palm oil etc.).

While CPI inflation in January 2021 is likely to fall to around 6 percent YoY because of a high base effect, it is likely to come in at 9.5-10.0 percent during the 2Q2021.

The analysts at Arif Habib Limited are also expecting the SBP to keep policy rate unchanged at 7.00 percent in the upcoming monetary policy statement.

This is backed by their view on:

 i) Inflation, which is expected to remain contained in short-to-medium term. Food inflation has started to ease off with essential food items’ prices (staple goods mainly). Government’s efforts to tackle supply side issues have slowed down the momentum of food prices as per recent SPI data. These measures along with high base effect should help keep inflation under check. Moreover, core inflation also has remained stable owing to subdued demand.

 ii) As the economy is currently hit by the ‘second wave’ of the pandemic, therefore, reviving the aggregate demand remains a challenge. Taking this into consideration, SBP might consider keeping the rate as it is despite running a negative interest rate of around 2 percent.

 iii) Moreover, it seems the fixed income market is also signaling towards unchanged stance as there was no major change in the treasury bills yields of 3-month and 6-month in the recent auction (on January 13, 2021) which were at 7.17 percent and 7.20 percent.

To recall, the Monetary Policy Committee (MPC) convened last meeting in November 2020 and noted that since its last meeting in September 2020, further improvement has been witnessed in the overall domestic recovery, which aided business confidence. Growth expectations have thus far remained in-line with the previously forecasted 2 plus percent for FY21. Some factors that helped the recovery momentum to continue included recent revival in high frequency activity indicators such as cement, steel and autos, government’s fiscal stimulus, and SBP’s several measures.