The State Bank of Pakistan (SBP) is likely to slash interest rate by 50bps in the upcoming Monetary Policy to be announced on November 30, 2011, analysts said. The SBP cut interest rate by 150bps to 12 percent in the previous MPS announced on October 8, 2011.
"The upcoming monetary policy statement (MPS), due on November 30, stands at a crossroads of either to protect the feeble economic recovery or to curb the looming inflationary pressure beyond January 2012 as the base affect fades away," analysts said.
"With real interest rate expected to remain in the positive territory (November CPI expected at 10.7-11 percent), we anticipate the central bank would follow the regional trend of providing impetus to the economic growth," Nauman Khan, an analyst at Topline Securities said.
"Therefore, we expect another round of 50bps cut in the upcoming MPS," he added. He said the given growth consideration as the key determinant, weakness in the fiscal and the current account would continue to pose a threat to the assessment of monetary easing cycle in the second half of fiscal year.
"Our premises of 50bps discount rate (DR) cut primarily stems from FY12 average inflation likely to fall around the initial target of 12 percent, positive real interest rate with November year-on-year CPI inflation to stand in the range of 10.7-11 percent (0.8-1.0 percent on month-on-month basis) and PKR depreciation against US$ remain controllable around 1.5 percent in FY12YTD despite signs of weakness in the current account numbers ($1.6 billion in the first four months of FY12 as against $541 million in the same period in FY11)," he said.
"Therefore, we expect the central bank would continue to focus its attention on supporting economic growth, which is in line with strategy adopted by other central banks of the regional," he added.
He said fears of economic slowdown has forced various central banks of regional countries namely Indonesia, Australia, Taiwan and Singapore to slash their policy rate recently, as their attention shifted from tackling inflation towards providing support to economic growth. Furthermore, central bank of Thailand and Malaysia are expected to follow the same.
"We believe the SBP in the upcoming monetary policy would continue to pursue a loosening monetary policy stance to induce private credit offtake, which has remained stifled so far in FY12," he said. During FY12YTD, private sector credit has contracted by Rs 48.3 billion as against expansion of Rs 23.7 billion in the same period last year. "Given this scenario, risk to our assessment comes from fragility of our external account and escalating fiscal deficit," he said, adding that "We expect country''s current account to stand in the tune of $2.7 billion (1.1 percent of GDP) in FY12 as against surplus of $268 million (0.1 percent of GDP) last year primarily on account of adverse commodity price shock and slowdown in capital flows because of security concerns and overall global economic slowdown."
"On the other hand, we expect fiscal deficit escalating beyond 6.0 percent of GDP, which includes one-time impact of energy sector debt swap deal, higher power related subsidy and shortfall in overall revenue collection," he added.