Karachi, September 12, 2023 – The State Bank of Pakistan (SBP) is likely to consider a substantial increase in the benchmark interest rate, potentially reaching a historic high above the current record of 22 percent.
As the nation grapples with relentless inflation, the central bank’s Monetary Policy Committee (MPC) is scheduled to convene on September 14, 2023, and the market is on edge, anticipating a pivotal decision.
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In the previous MPC meeting, the SBP kept the rate unchanged at 22 percent. However, financial analysts at Insight Securities suggest that the forthcoming meeting may witness a policy rate hike ranging between 100 to 200 basis points.
The primary impetus behind this anticipated rate hike remains the persistently high inflation levels, which have defied expectations of subsiding in the second half of 2023. Essential food items’ prices continue to soar due to a lack of administrative control, coupled with escalating energy tariffs triggered by the devaluation of the PKR and structural inefficiencies.
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However, critics argue that further rate hikes might prove counterproductive, given the already elevated interest rates and the country’s economic slowdown. In Pakistan, inflation is predominantly driven by supply-side factors, exacerbated by abrupt currency depreciation.
Additionally, an increased policy rate would intensify the federal government’s debt servicing burden, a matter of grave concern given the limited fiscal space. For FY24, the projected debt servicing cost stands at approximately PKR 7.3 trillion, dwarfing the anticipated revenue of PKR 9.4 trillion.
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Recent T-bill auctions reflect the financial sector’s preparations for an imminent rate hike of 150 to 200 basis points. Yields for 3-month and 12-month bills have surged by approximately 162 and 213 basis points, respectively, with cut-off yields for 3-month, 6-month, and 12-month papers hovering around 24.49%, 24.78%, and 25.06%, respectively.
Analysts foresee the headline Consumer Price Index (CPI) hitting a peak of 31.1 percent in September 2023, primarily driven by surging food and petroleum product prices. In the months ahead, inflation is expected to remain elevated, chiefly influenced by energy tariff adjustments and the low base effect from September 2022 due to electricity tariff adjustments.
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Headline inflation is projected to average around 28.4% until December 2023, with an annual inflation rate of approximately 24% for FY24, not factoring in the potential impact of an impending gas price hike. Notably, core inflation in August 2023 stood at approximately 25.9% and 18.4% in rural and urban areas, respectively. It is anticipated that the SBP will opt for an increase of approximately 150 basis points in the upcoming MPC meeting to attain positive real rates on a forward-looking basis, aligning with the IMF’s recommendations.
Recent government actions against hoarding of perishable items like sugar and wheat, coupled with efforts to curb smuggling, have begun to yield results. This has led to a noteworthy decrease in the open market exchange rate for the US dollar, which has fallen by approximately 11% in the past seven days. The administration’s endeavors to contain inflation expectations and vigilant monitoring of the forex market are expected to deter speculative activities, potentially resulting in increased inflows through formal channels.
