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The Monetary Policy Committee meeting is expected by the end of this week. There might no surprises. The status quo is likely to maintained. In the last meeting (Nov 20), out of nine members, one voted for 25 bps hike. The number of votes for hike might increase in Jan and March; but not likely to become majority any time before May. All signs are showing that there will be 1-2 percentage points increase in the rates in this calendar year.

The recent imports numbers – crossing $5 billion a month must have awakened some of the hawks within the monetary policy committee. But seeing the inflation easing (due to base effect and correction in perishable food items), persistence of COVID cases and absence of the IMF, the doves are likely to dominate. The real interest rates are in territory of minus 1-2 percent. This negative real rate trend is likely to continue till the fear of COVID is alive; but seeing the moving up of commodity prices (mainly oil) and pick-up in consumer demand (visible for automobile financing), it’s just a matter of time before wind changes direction.

The current account is likely to be in deficit in December after five straight months of surplus. This is despite the fact that monthly exports are the fourth highest in the country (textile exports highest ever) along with continued remittances bonanza. It is imports that is building the hawkish sentiments. Last time when imports were north of $5 billion (PBS data), current account deficit was over $1 billion a month. Now there will be marginal deficit of $200-400 million. Such levels are sustainable, given exports and remittances remain upbeat.

The pressure to increase rates will build when the current account stays in deficit for a few months, when the inflation is higher than 9 percent, and when the IMF prograramme is back. On inflation, January would be a comfortable month. The high base of last year will make the inflation number even below 7 percent in Jan 2021. The SPI is below 6 percent in the last recording.

But the party will be short-lived. The base effect will go against the tide by April. The electricity tariffs will be revised upwards pretty soon. The international oil prices are flirting above $50. The food and other commodities are up too in the international markets. All these factors would have an impact on inflation in Pakistan. The inflation is likely to be in double digits in the April-June quarter. The IMF would likely be back by then too. The imports growth would be higher given rise in oil prices. All the signs are showing of change in heart at SBP in 2Q-3Q of this calendar year.

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