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KARACHI: The State Bank of Pakistan (SBP) is scheduled to announce the Monetary Policy next Monday (March 18) with mixed expectations on key interest rate.

Previously, the Monetary Policy Committee (MPC) of SBP increased the rate by 100 basis points to 22 percent in June 2023. Since then the committee has kept the policy rate unchanged on higher inflation and sustainable growth.

As the MPC is going to meet on March 18, to review the economic indicators and take a decision on monetary policy stance, the market has mixed expectations on the policy rate.

Monetary Policy Committee: SBP issues advance calendar for meetings in January-June 2024

While opinions within the market are divided, with some anticipating the MPC to maintain the status quo as Pakistan is in the process of negotiating a new IMF program given that the IMF has consistently advised maintaining a tight monetary policy stance. Some are expecting a cut of up to 100 bps.

Analysts at AHL Research said that there is strong possibility that the SBP may contemplate kick-starting the interest rate reversal cycle by implementing a 100bps cut in the upcoming policy.

However, analysts at AHL believed that a data-driven approach will be pivotal in forming the SBP’s decision-making process. This approach would likely take into consideration the downward trajectory of both headline and core inflation, which we anticipate to average approximately 17 percent and 15 percent respectively, resulting in significantly positive real interest rates on a forward-looking basis. This aspect was also underscored in the SBP’s previous MPS, they added.

AHL projections point towards a downward trajectory in headline inflation, more prominent towards the latter half of FY24 and overall forecast culminates in an estimated annual average of 25 percent for headline inflation in FY24 compared to 29.2 percent in FY23.

Several contributing factors, including the substantial base effect, stabilization of global commodity prices, support from the stability of the PKR against the USD, and efforts to curtail the current account deficit, underpin these expectations, they added.

Moreover, the recent data released by the PBS reveals a jump in the production of LSMI for Dec ’23, indicating a 3.4 percent increase compared to the same period of last fiscal year.

On the external front, during the first seven months of FY24, the current account deficit decreased by 71 percent YoY to $1.09 billion down from the $3.8 billion deficit recorded in the same period of last fiscal year.

Additionally, the improvement in SBP reserves, ie, rising from $4.4 billion at the end of Jun ’23 to $7.9 billion in the first week of Mar-24.

Analysts at Spectrum Securities are expecting SBP to keep the policy rate unchanged at 22 percent.

Real Effective Exchange Rate (REER) witnessed an increase as it clocked in at 101.70 in Jan ’24, up from 98.83 in Dec ’23, showing some weakness of PKR. Furthermore, the monthly inflation is expected to remain at a higher side due to Ramazan and Eid festival, they added.

Moreover, the expectation of new taxes, as per the IMF recommendation, coupled with increase in gas and electricity tariff, would also be the other factors which keep the inflation on a higher side.

They said that easing of the policy rate is expected to stimulate demand and the government lacks adequate foreign reserves to finance the imports necessary to meet this aggregate demand.

If the government opts to prioritize boosting imports, it could exacerbate the strain on Pakistan’s forex reserves, leading to further depreciation in PKR and thus again generate inflation, they maintained.

Copyright Business Recorder, 2024


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