SBP likely to jack up rate by 100 basis points | The Express Tribune

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KARACHI:

Pakistan’s central bank is scheduled to meet on Thursday to decide its key policy rate for the next
six weeks.

A majority of experts expect the bank to increase the rate by around 100 basis points to control high inflation and narrow the current account deficit.

However, some of the experts said it would be a very tricky monetary policy this time around. The State Bank of Pakistan (SBP) may leave the market surprised by maintaining the status quo as the rate is already standing at a high level at 13.75%.

Those experts who said the bank would increase its rate thought that inflation would remain a big concern and the rate hike was a must to control it. Others said the key policy rate was an ineffective tool to control inflation this time around.

It is an imported inflation as the surge in global commodity prices forced the government to pass on the impact to the local consumers and taming the imported inflation is beyond the central bank’s control.

More importantly, the aggregate demand has started coming down following the government measures. For instance, petrol and diesel sales have dropped 12% and 16% respectively and the large-scale manufacturing (LSM) sector has contracted. A further increase in the rate may compromise
economic growth.

Besides, the global commodity prices have started decreasing on concerns over the global recession. Prices of crude oil, coal, wheat, and cooking oil have reduced sharply in recent days.

The latest developments should automatically reduce Pakistan’s inflation reading and narrow the current account deficit.

Therefore, the central bank may decide to maintain the status quo and the rate seems to be peaking out at the current 13.75%. The bank has cumulatively revised the key policy rate by 675 basis points since September 2021.

“The most important thing to be seen would be the central bank’s forward guidance (outlook) in the monetary policy statement that whether it accounts in petroleum crude oil price at $65 per barrel or $380 per barrel. The forward view of the bank would guide it on Thursday (July 7) as what should be the policy rate for the next six-week,” BMA Capital Executive Director Saad Hashemy said while talking to The Express Tribune.

Citi has anticipated a couple of days ago that crude oil prices would collapse to $65 per barrel amid global recession by the year-end. Prior to it, a few days ago, JP Morgan sees oil spiking to $380 per barrel in the worst case amid the Russia-Ukraine war.

He, however, said the central bank would increase the rate by 100 basis points to 14.75% to narrow down the spread between its key policy rate and the six-month Karachi inter-bank offered rate (Kibor) rate at 15.5% at present. “Traditionally, the spread used to be around 50-75 basis points which are standing at 175
basis points at present.”

Ismail Iqbal Securities Head of Research Fahad Rauf foresaw the status quo in the rate, saying the central bank can control only demand-driven inflation through an increase in the policy rate, while the current inflation is due to price-hike (cost-push) of commodity prices which is beyond its control.

AHL Head of Research Tahir Abbas anticipated a rate hike by 100 basis points to tame inflation and cut the current account deficit.

The inflation reading may continue to spike over the next three to four months. It came to a 13-year high at 21.3% in June 2022. “Inflation is estimated to peak around 23% in a few months to come in the wake of an increase in petroleum products and power prices.”

The increase in the rate would be the last one under the current cycle of rate-hike since September 2021. The central bank would maintain the July 7 level for some months and later on may decide to reduce it to supply economic growth, he said.

Pak-Kuwait Investment Company Head of Research Samiullah Tariq foresaw a 125 basis points hike in the policy rate.

Published in The Express Tribune, July 7th, 2022.

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