The State Bank of Pakistan (SBP) will release Monetary Policy Statement (MPS) today (Saturday) for next two months. The central bank's board is going to meet on January 29, 2011 at SBP head office to review the monetary policy stances. Before SBP board's meeting, Monetary Policy Committee (MPC) constituted by SBP will finalise its recommendations and suggestions regarding monetary policy and later the central bank's board will take final decision on the key policy rate.
Economists and analysts have expressed different opinion regarding key policy rate and most of them believe that SBP would increase key policy rate by 50 basis points because of high inflation and excessive government borrowings. Currently, the key policy rate stood at 14 percent. Owing to rising inflationary pressure, the State Bank, in November 2010, announced to raise its Policy Rate by 50 basis points from 13.5 percent to 14 percent.
"We are expecting that SBP will hike policy rate by 50bps in its January 29 policy meeting, with the overnight deposit and lending rates rising to 11.5 percent and 14.5 percent, respectively," said Sayem Ali, an economist. Inflation risks have increased since the last meeting in November 2010, because of rising commodity prices and strong money supply growth, up by 17 percent YoY by end-December 2010 against 11.4 percent YoY in June 2010, as the government continues to print currency notes to finance its rising deficit, he added.
The government's latest measures to contain inflation include reduction in taxes on petroleum products and shelving plan to implement the reformed sales tax (RGST). However, these measures will provide temporary respite, but could, ultimately, lead to higher inflation, as the government will need to print more money to finance higher spending, Ali said. The finance minister has issued a stark warning that inflation could surge to 22 percent in 2011 unless policy makers take corrective measures, he added.
"Although, the government budgetary borrowing and inflation is higher than expectation, at the same time there are some positive indicators, which may force central bank not to raise interest rate," said Muzzamil Aslam, an economist at JS global.
During the first six months of fiscal year 2011, current account deficit has posted $26 million surplus, exports are on the rise, government borrowings are on decline and government has also announced to reduce cabinet's size aimed to cut expenditures," he said and added, "these developments supports our outlook that SBP will maintain key policy rate at 14 percent."
Although CPI inflation is on the rise but the December inflation has posted a decline of 0.51 percent. While, due to high interest rate Large Scale Manufacturing growth is on negative side, therefore to provide more financing to the private it is necessary to stable policy rate, Muzammil said. Khurram Shehzad, an economist at Investcap, says there may be some 50 bps increase in policy rate. "The government is taking temporary measures for the betterment of economy and these measures are insufficient to put the economy on track," he said.
He said that first six months current account deficit was surplus, thanks to the payment of $630 million from US on account of collation support fund. This payment has also helped government to reduce its borrowing from SBP. "Therefore, we can not say that economy is on the track," he added.
While, reversal of increase in petroleum products' prices was also a temporary measure and in the near future the government will be compelled to increase oil prices because of rising trend in international market. Increase in petroleum products' prices will definitely further the inflationary pressure on the economy, Khurram said. "Therefore, it is expected the central bank would continue its tight monetary policy stances and key policy rate may go up by 50-100 bps in January 29 announcement," he concluded.