Monetary policy: majority expects at least 100bps hike as inflation highest since Dec 2008

As Consumer Price Index (CPI)-based inflation in Pakistan hit its highest level since December 2008, a majority of financial market participants now expect the policy rate to go up by at least 100 basis points (bps) after the Monetary Policy Committee (MPC) meeting currently scheduled to be held on July 7, 2022.

Consumer Price Index (CPI)-based inflation hit 21.3% on a year-on-year (YoY) basis in June 2022, compared to an increase of 13.8% in the previous month and 9.7% in June 2021, revealed data released on Friday, as rising commodity prices and a weaker rupee took a toll on the local economy.

Meanwhile, on a month-on-month basis, CPI-based inflation increased by 6.3% in June 2022 as compared to an increase of 0.4% in the previous month and a decrease of 0.3% in June 2021, stated the Pakistan Bureau of Statistics (PBS).

Around 45% of the participants expect the policy rate to increase by 100bps, 30% anticipate an increase of 150bps, while 5% expect an increase of more than 150bps: Topline Securities' poll

The CPI figures were led by a significant jump in transport and food segments which clocked in at 62% YoY and 26% YoY, respectively.

“This was led by a 40% increase in petrol prices that impacted CPI and also resulted in higher food prices due to increase in transportation cost,” said Topline Securities in a note.

This sharp surge in inflation especially in the transport segment was driven by a successive increase in fuel prices by the government, said the brokerage house.

In a late-night development on Thursday, the government announced another hike in the prices of petroleum products, with the new ex-depot price of petrol going up to Rs248.74 per litre (after a hike of Rs14.85), and diesel to Rs276.54 (after a hike of Rs13.23).

The brokerage house said it expects inflation to remain elevated during the next 4-6 months with average reading for FY23 likely to remain in the range of 17-19%.

In its poll conducted to gauge expectations on the upcoming monetary policy announcement, it found that 80% of the participants expected an increase in the policy rate.

“Around 45% of the participants expect the policy rate to increase by 100bps, 30% anticipate an increase of 150bps, while 5% expect an increase of more than 150bps,” it said.

The central bank in its last MPC held in May increased the policy rate by 150bps to 13.75%.

Meanwhile, for the remainder of FY23, 49% of the participants expected an increase of more than 100bps whereas 26% of participants anticipate an increase of 100bps. The remaining participants expect no change or decline in rates in the remainder of the fiscal year.