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Analysts perplexed as SBP hikes key interest rate to 16% — highest since 1998-99

  • Some say SBP's comments on demand compression and raising policy rate are in contradiction
Published November 25, 2022

In a development that took markets by surprise, the Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) raised the key interest rate by 100bps, taking it to 16%, the highest since 1998 when it stood at 16.5%.

Ahead of the monetary policy announcement, majority of market participants polled had expected the central bank to maintain status quo at 15%.

"This decision reflects the MPC’s view that inflationary pressures have proven to be stronger and more persistent than expected. It is aimed at ensuring that elevated inflation does not become entrenched and that risks to financial stability are contained, thus paving the way for higher growth on a more sustainable basis," the MPC said in its statement on Friday.

Read the detailed story here: SBP raises key interest rate by 100bps, takes it to 16%

“Looks like the SBP remains more concerned with rising inflation,” said Mohammed Sohail, CEO Topline Securities, in a note.

“Moreover, (International Monetary Fund) IMF talks for the next tranche are delayed which may have also compelled the committee to take this step to fight inflation."

Business Recorder also reached out to other market experts for their reaction after the announcement.

Fahad Rauf, Head of Research at Ismail Iqbal Securities Limited, said the SBP's decision contradicts points raised by the MPC.

“It seems that pressure from the IMF has driven this decision. SBP's statements point towards demand-compression. A rate hike will only suppress it further," Rauf told Business Recorder.

“The central bank is too focused on inflation. It used to take into account the overall economic scenario — not just inflation.

"The SBP says economic demand, credit demand and GDP growth has slowed. What would the central bank achieve with a rate hike?"

Rauf said financing cost would increase, and dent the corporate sector's bottom-line.

“This would further accelerate economic slowdown,” he said. “Markets including equities are likely to react negatively."

Similar views were expressed by the Pakistan Business Council (PBC), as it believed that the rate hike would negatively impact the formal sector.

"The 100bps increase in policy rate is not supported by MPC’s Policy Statement which acknowledges demand compression and attributes inflation to cost and supply side issues. The unjustified increase will further impact the formal sector suffering from import curbs," PBC tweeted.

Saad Khan, Head of Research at IGI Securities, expressed concern over the change in SBP's stance pertaining to inflation numbers, after the MPC revised upwards its inflation projections for FY23.

“Globally, inflation is decreasing now. However, it seems that the SBP expects higher inflation in Pakistan, especially through energy bills."

The market analyst said Large Scale Manufacturing (LSM) is already declining in the country after the LSM Index which peaked to 153.6 in March dropped to 115 in September.

“The decision would choke credit liquidity in the domestic market, denting the industrial sector further,” he said.

On the other hand, Tahir Abbas, Head of Research at Arif Habib Limited (AHL), said global and domestic supply shocks, as well as energy tariff adjustments elevated inflation projections of the MPC at a time when external account challenges continue.

"This necessitated a 100bps hike," he said.

Samiullah Tariq, Head of Research and Development at Pakistan Kuwait Investment Company Limited, said the central bank decision was "unexpected".

“I think it is unexpected when you see analysts' expectations, but in line with global central banks,” said Tariq.

Earlier this month, the US Federal Reserve raised its policy rate to a range of 3.75%-4%, its fourth straight 75-basis-point interest-rate hike, as it seeks to rein in demand for goods, services, and labor so as to reduce inflation that's running more than three times the Fed's 2% target.

Subsequently, the Bank of England increased Bank Rate to 3% from 2.25% and warned that the British economy might not grow for another two years.

Sana Tawfik, vice-president research and a senior analyst at AHL, too expressed “surprise” over the SBPs decision.

This is “followed by continued external account challenges, and lastly projections for GDP growth of 2% and current account deficit of 3% of GDP for FY23 shared in the last policy have been maintained after incorporating the Post-Disaster Needs Assessment of the floods”, she said.

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