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Market experts disagreed with JPMorgan, a leading global financial institution that penciled in an interest rate hike of 400 basis points by the end of fiscal year 2023 (June 30), arguing that pressure on Pakistan’s economy stemming from inflation and external factors would subside in coming months.

JPMorgan, in its ‘Asia Pacific Economic Research’ on December 5, 2022, had said it was penciling “in another 400bps of hikes, bringing the policy rate to 20% by end-FY23”.

However, experts disagreed with the projections.

“I believe this will not be the case,” Samiullah Tariq, Head of Research at Pak Kuwait Investment Company Limited, told Business Recorder.

“We expect external pressure would subside in coming months.

“You could expect the hike in policy rate to the tune 100-150bps by the end of this fiscal.”

Saad Khan, Head of Research at IGI Securities, said the market looks at core inflation readings for interest-rate projections.

“Interest rates are expected to hike due to the central bank’s current mandate of taming inflation,” he told Business Recorder. “The central bank would go to great lengths to curb it. Hence, we believe that the increase could be of 100-200bps.

Khan added that JPMorgan could be looking at headline inflation, but market remains interested in core inflation. “The State Bank of Pakistan (SBP) has paid a lot of attention to core inflation in its last MPC.”

In its extract from ‘EM Edge Data Watch’ on Pakistan, JPMorgan said the country’s central bank last month raised the policy rate by 100bps to 16% against consensus expectations and its own for a hold, citing strong and persistent inflationary pressures.

“This is an abrupt change from the dovish tone adopted since August when the central bank signaled a greater emphasis on supporting growth in the aftermath of the floods,” said Jin Tik Ngai, covering Emerging Markets Asia at JPMorgan.

“To some extent, the rate hike could reflect implicit pressure from the International Monetary Fund (IMF) to stay on top of inflation ahead of the delayed 9th EFF review as well as a preemptive move to guard against currency pressures ahead of high-profile external debt servicing (e.g., US$1 billion Eurodollar bond payment in December) even as reserves continue to fall.

“In our view, if policy orthodoxy against inflation returns and stays, the SBP remains behind the curve based on their historical reaction function. We now pencil in another 400bps of hikes, bringing the policy rate to 20% by end-FY23.

Pakistan projected to be sixth-largest economy by 2075

Last month, the Monetary Policy Committee (MPC) of the SBP, in a move that took the markets by surprise, raised the key interest rate by 100bps, taking it to 16%, the highest since 1998-1999.

“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 back then.

Meanwhile, JPMorgan in its report highlighted that remittance inflows into Pakistan have tapered off in recent months i.e. averaged $2.5 billion in Aug-Oct 2022, after rising to an all-time high of $3.1 billion in April, though they still remain elevated compared to pre-pandemic levels, which average $1.7 billion per month in 2015-19.

“We think a key reason is the slower pace of adoption of digital remittance services as borders reopen and international travel normalises.

Remittances may drop by 7.4pc to $29bn: World Bank

“Other reasons may include the moderation of oil prices since 2Q22 and the stabilization of the PKR (Pakistani rupee), which might have reduced incentives to remit back Foreign Exchange FX,” said JPMorgan.

“From a longer term perspective, we expect workers’ remittances to resume a gradual uptrend on a steady increase in migrant worker flows, notwithstanding temporary ebbs and flows from the global business cycle,” it said.


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