SBP to issue policy announcement on Jan 23; another hike of 100bps likely

SBP to issue policy announcement on Jan 23; another hike of 100bps likely

KARACHI: State Bank of Pakistan (SBP) is scheduled to issue a monetary policy announcement on January 23, 2023 as the market is expecting another hike of 100 basis points to bring the benchmark rate to 17 per cent.

As per the survey conducted by Insight Securities, majority participants (86 per cent) expects policy rate to increase by at least 100bps. Out of these, 45 per cent respondents expects policy rate to increase by 100bps, 17 per cent expects an increase of 150bps while 24 per cent participants expects benchmark rate to increase by more than 150bps.

Similarly, the Insight Securities also expects the central bank to increase the benchmark rate by 100-125bps in the upcoming Monetary Policy Committee (MPC) meeting due to elevated inflation in December 2022 as Consumer Price Index (CPI) clocked in at 24.5 per cent against 23.8 per cent in November 2022.

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In addition, there are multiple upside risks to inflation estimates as hike in energy tariff is long overdue along with implementation of market based exchange rate regime.

Secondary market yields also reflect the same expectation of policy rate hike, where 3M, 6M and 12M yields recorded an increase of 140bps, 140bps and 139bps respectively, since the last MPC meeting.

SBP has increased policy rate by 900bps since September 2021 to curtail mounting inflationary concern and reduce pressure on the external front. However, lack of measures on the fiscal front and tug of war between political parties has derailed the economy into abyss.

Delays in implementation of much needed reforms and conditions demanded by the IMF has severely impacted the country’s FX position as foreign exchange reserve with SBP stands at $4.6 billion as against $9.8 billion at the end of June 2022.

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Majority participants expect policy rate to remain elevated at the end of FY23. As per survey, 38 per cent of participants expect policy rate to clock between 17 per cent-18 per cent, while 21 per cent participants expect policy rate to close above 18 per cent by the end of FY23.

The rising trend of core inflation is a serious concern for SBP as upward adjustment in fuel prices has started to reflect. To note, core inflation clocked in at 14.7 per cent and 18.9 per cent for urban and rural basket in December 2022.

Since the start of this monetary tightening cycle where the central bank has raised the policy rate by 900bps, the benchmark rate has moved in tandem with core inflation.

The analysts opine that policy rate is likely to remain elevated in next 6-8 months as there are multiple upside risks to inflation estimates due to long overdue revision in energy tariffs.

As per the survey, 55 per cent participants expect monetary easing to start in 4QCY23, while 28 per cent respondents expect the policy rate to reverse in 3QCY23.

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The administrative measures by the government were successful to arrest current account deficit (CAD) but the unofficial peg has resulted in a wide gap between the interbank dollar rate and open market rate, which is hurting inflows from official channels as people are relying on unofficial means to send money.

They believe that the exchange rate is likely to witness a steep rise once it adjusts with market realities. According to our survey, 40 per cent respondent expects PKR/USD to clock between 250/USD to 260/USD by the end of FY23, while 27 per cent participants expect it to clock between 260/USD to 270/USD. In addition, 7 per cent respondents anticipate the official exchange rate to cross 270/USD.

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