Karachi, September 8, 2023 – A survey conducted by Topline Securities indicates that a majority of respondents anticipate the State Bank of Pakistan (SBP) will increase the benchmark interest rate to a record high of 24 percent in the upcoming monetary policy committee (MPC) meeting scheduled for September 14, 2023.
In its last policy meeting on July 31, 2023, the SBP held the benchmark policy rate steady at 22 percent. However, the survey findings suggest that economic dynamics have shifted since then, prompting expectations of a significant rate hike.
According to the survey, approximately 54 percent of participants expect interest rates to rise by 200 basis points, while 18 percent anticipate a more moderate increase of up to 100 basis points. An additional 12 percent expect a 150-basis-point increase, and 10 percent predict a substantial 300-basis-point hike. Only 7 percent of respondents foresee no change, and no one expects an increase in the policy rate by more than 300 basis points.
The SBP’s recent commitment to data-driven policy decisions and an IMF Country Report emphasizing the need for a tight and proactive monetary policy have further fueled expectations of an interest rate hike.
Several significant developments have influenced these expectations, including Pakistan’s shift from a current account surplus to a deficit of US$809 million in July 2023, a 19 percent increase in local fuel prices, a 6 percent rise in international oil prices, and a 6 percent depreciation of the rupee against the US dollar.
Heightened concerns over inflation and the current account outlook have led to increased yields in T-Bill auctions, with cut-off yields now standing at 24.5 percent, 24.8 percent, and 25.1 percent for 3, 6, and 12 months, respectively. Secondary market yields on T-Bills and PIBs have also seen significant increases since July 31, 2023.
Regarding the expected policy rate in June 2024, 31 percent of participants anticipate it to be in the range of 22-24 percent, while 25 percent expect it to fall between 20-22 percent, and 23 percent predict a range of 24-26 percent. Only 18 percent expect the policy rate to be below 20 percent, with 3 percent expecting a rate above 26 percent.
In terms of average inflation for FY24, 34 percent of respondents expect it to range between 22-24 percent, while 21 percent anticipate inflation between 24-26 percent. Additionally, 18 percent predict inflation to fall between 20-22 percent, while 21 percent expect it to exceed 26 percent, and 5 percent foresee inflation below 20 percent.
Notably, Pakistan’s CPI inflation for August 2023 decreased to 27.4 percent YoY compared to 28.3 percent YoY in July 2023, attributed to the high base effect from the previous year and lower food prices. However, recent increases in local fuel prices and rupee devaluation against the US dollar have led analysts at Topline Securities to revise their inflation estimate upward to 23 percent for FY24.
Considering these developments, analysts believe the SBP may adjust its inflation targets upward from the previous range of 20-22 percent for FY24.
In summary, given the economic landscape and the survey results, it is expected that the SBP will announce a substantial 200-basis-point interest rate hike, taking the policy rate to a record high of 24 percent in the upcoming MPC meeting. Respondents also anticipate the PKR/USD parity in the interbank market to range between Rs320-340 by June 2024.