KARACHI: State Bank of Pakistan (SBP) may increase the benchmark interest rate by 100 basis points to 17 per cent in upcoming policy announcement, analysts said on Monday.
The SBP is scheduled to announce the monetary policy on January 23, 2023 (next Monday).
Analysts at Arif Habib Limited expect SBP to increase the policy rate by 100bps to 17 per cent in the upcoming monetary policy. To recall, in the last MPS in November 2022, policy rate was increased by 100bps to 16 per cent and as per MPC, this stance was taken to contain the impact of elevated domestic inflationary pressure, so as to embark on a path of sustainable recovery.
The recent Balance of Payment numbers show that Pakistan’s current account deficit during first five months (July – November) 2022-2023 decreased by 57 per cent to USD 3.1 billion compared with a deficit of USD 7.2 billion during the same period last year. This YoY decline is mainly on the back of lower imports, down 16 per cent YoY.
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With the measures taken by the authorities to curb import along with decline in international commodity prices, current account deficit is likely to remain lower in FY23 compared to FY22’s CAD.
However, despite contained CAD, Pakistani Rupee (PKR) remained under pressure mainly due to depleting reserves which went down from USD 13.9 billion (Jul’22) to USD 10.2 billion in a span of approx. six months mainly on account of external repayments. Resultantly, The PKR against USD depreciated almost 10.2 per cent since beginning of FY23TD.
Moreover, SBP believes that Pakistan’s external financing needs should be aided by rollovers by bilateral official creditors, new lending from multilateral creditors, and a combination of other inflows. Thus, pressure on the Rupee should lessen while SBP’s FX reserves should assume the upward trajectory which currently stand at USD 4.3 billion (06-Jan-2023).
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On the inflationary front, the headline inflation continues to remain in the double digit since November 2021 mainly on the back of uptick in food and energy prices. The average inflation for first half (July – December) of 2022-2023 clocked-in at 25.02 per cent compared to 9.81 per cent in 1HFY22.
This phenomenon of higher headline inflation is likely to continue in the near term with pressure mainly emanating from any further energy tariff hikes, weaker currency against the greenback and surge in food prices.
READ MORE: SBP raises benchmark interest rate by 100 basis points to 16pc
Moreover, the State Bank of Pakistan (SBP) also highlighted the same in its latest monetary policy meeting held on November 25, 2022 in which it hiked the benchmark policy rate by 100bps to 16 per cent.
The current stance for rate hike, as per the SBP, was aimed at containing the impact of elevated domestic inflationary pressure, so as to embark on a path of sustainable recovery. Moreover, SBP also revised its inflation expectations for FY23 to 21-23 per cent from 18-20 per cent previously.
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Meanwhile, the shape of the yield curve to extrapolate markets’ expectations for monetary policy, and the secondary market yields since the last monetary policy of November 2022 have increased to 16.97 per cent | +119bps (3M), 17.01 per cent | +122bps (6M) and 17.06 per cent | +126bps (12M). It can be assumed that the market too expects SBP to increase the policy rate in the upcoming policy.
