The policy rate is expected to rise by another 100bps from 10.75 percent to 11.75 percent in the upcoming monetary policy expected to be announced on May 20, 2019, analysts said. The aggressive monetary tightening is expected to continue by the central bank as it is going to be the seventh consecutive rate hike, Arsalan Hanif, an analyst at Arif Habib Limited said.
The monetary tightening is expected on the back of rising inflationary pressure due to rise in prices of petroleum products and essential food items coupled with continuous slide of PKR leading to surge in prices of imported and local products (sold on import parity), mounting fiscal deficit despite sharp cut in PSDP and rationalization of tariffs and duties and narrowing real interest rate as it declined to 1.66 percent in May 2019 compared to last four year's average of 2.75 percent. "We believe the State Bank of Pakistan is adopting a proactive stance to increase policy rate on account of higher inflation in upcoming months alongside attempting to curtail the current account deficit," he added.
Furthermore, it seems like the money market has already incorporated the rate hike which is essential to fulfill the gap of 61bps between 12-M T-Bills (11.86 percent) and Discount Rate (11.25 percent), he added.
"Since Oct'11, we have observed that during the International Monetary Fund (IMF) period real interest rate (RIR) has always remained on the higher side at an average of 3.1 percent compared to an average of 2.2 percent in non-IMF period," he said, adding that this depicts that the IMF expects an increase in discount rate for sustainability despite lesser CPI during the period.
"We have conducted a short survey from institutional investors regarding their views on interest rate in upcoming Monetary Policy (MP) and outlook on interest rates going forward," he said.
For upcoming MPS, 53 percent of the respondents view that there would be a 1.0 percent rate hike. Moreover, 71 percent of the respondents are of the view that the rates have not peaked out yet and there will be an additional 1.0 percent interest rate increase by June 2020, Arsalan Hanif said.
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