Brokerage house sees interest-rate hike of 150bps as inflation bites

A brokerage house sees the State Bank of Pakistan (SBP) jacking up the key policy rate by 150 basis points (bps) in its upcoming Monetary Policy Committee (MPC) meeting on September 14 as it looks to tame runaway inflation in the country.

Arif Habib Limited (AHL), in its report released on Thursday, said it expects the SBP to raise the key policy rate by 150bps to 23.5%. The key policy rate already stands at a record high of 22%.

“We believe the SBP might consider increasing interest rates as a precautionary measure to address the persistently high levels of inflation in the country,” said AHL.

The brokerage house noted that during 2MFY24, inflation remained alarmingly high, averaging around 27.8%.

“This ongoing inflationary trend is expected to persist, with our forecasts indicating an average inflation rate of ~28.5% until December 2023, particularly following an expected peak in September 2023,“it said.

AHL identified several significant factors contributing to a sustained inflationary pressure, including: i) the depreciation of the Pakistani rupee against US dollar, ii) the surge in global oil prices, including Arab Light (up 5.2% since last MPS), and iii) elevated food prices.

Apart from these factors, there are expectations of a substantial increase in gas tariffs of ~40-45%, which could further amplify inflationary pressures, said AHL.

Back in July, the SBP kept the policy rate unchanged at 22%.

The MPC back then acknowledged a reduction in economic uncertainty since the last meeting and successful resolution of near-term external sector challenges, which boosted investor confidence.

However, it had highlighted that there were some emerging upside risks to inflation.

Despite a series of interest rate hikes – the key interest rate stood at 16% at the start of 2023 – Pakistan remains engulfed in a crisis of high prices.

Persistent fall in the rupee, high taxation, and increasing tariffs of energy and petroleum prices have continued to take their toll on purchasing power.

AHL highlighted that the current economic landscape of Pakistan is characterised by a growing current account deficit as a result of a shift in the country’s import policy.

“This shift has led to a significant surge in imports, with a 30% MoM increase witnessed in July 23 alone. Moreover, the depreciation of the PKR against the USD has been substantial (~6%) since the last MPS announcement in July 23, which is expected to further intensify the inflationary pressures.”

Poll results

AHL said it conducted a survey in order to find out what the market is expecting in the upcoming monetary policy.

Its respondents included banks, asset management companies, insurance, and development financial institutions as well as representatives from non-financial services/manufacturing sectors.

In its results, it found that 68.8% of the total respondents are of the view that the SBP will increase the policy rate, of which: 37.5% are expecting a rate hike of 100bps, while 31.3% are foreseeing a rate hike of 200 bps.

On the other hand, 31.3% of the total respondents are of the view that policy rate will remain unchanged at 22%.