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Thursday March 28, 2024

SBP expected to keep policy rate unchanged; inflation in focus

By Shahnawaz Akhter
September 24, 2016

KARACHI: The State Bank of Pakistan (SBP) is likely to keep the benchmark interest rate unchanged for the two-month monetary policy to be announced today as there is no mounting pressure on the local currency despite a drop in the dollar inflows, while inflation is also ratcheting up, analysts said. 

Zeeshan Afzal, executive director at Insight Securities said currently there is no pressure on the foreign currency reserves despite a widening current account deficit.  

In July-August 2016/17, current account deficit sharply widened 92 percent to $1.136 billion due to a decline in inflows of remittances, slowdown in foreign direct investment and ballooning trade deficit.

“The problem may emerge when the government won’t have sources to finance the deficit,” Afzal added. “That is not a situation at present.” 

The analyst said the financial inflows are committed. There is no heavy debt repayment in the near future. The Euro bond debt repayment will start in 2018, while major repayment in lieu of the International Monetary Fund’s loan will begin in 2020, he added.  

A BMA Securities report said an expected contraction in real interest rate below 100 basis points from December 2016 and onwards amid a gradual uptick in consumer price index (CPI) owing to conclusion of the base impact, rupee depreciation and rise in commodity prices warrant a prudent approach from the central bank.

The brokerage house expected the interest rate to start increasing from early 2017. “However, any rate increase will be gradual and be limited to 25bps-50bps in the first phase,” it said.

In the last monetary policy statement in July, the central also kept the key policy rate unchanged at 5.75 percent after reducing it 25bps from six percent in May. 

Muhammad Sohail, chief executive office at Topline Securities said the widening current account deficit can affect the policy decision. “[However], there is high probability of a status quo,” he said. “Though average inflation will stay below the target the latest upward trajectory is worrisome for the regulator.” 

Afzal said CPI, which is a tool to gauge inflation in the economy, may rise to 3.9 percent in Sept. as compared to 3.6 percent in Aug. and 1.3 percent in Sept. 2015.

“Interest rates have bottomed out. We expect status quo where both upside/downside risks to forward CPI are present,” he said. 

The international oil prices are currently hovering around $47/barrel. Analysts believed that the prices will rebound beyond $50/barrel in the coming days. “Increase in international oil prices will pressurise the local economy,” said Sohail.

Muzzamil Aslam, chief executive officer at Invest and Finance Securities Limited said balance of payment is under pressure due to slowdown in remittances, surge in imports and decline in exports. 

Some analysts, however, see a room for a 50 basis points cut in the policy rate due to a gap in the real interest rate of around 170bps. But, they also said the monetary policy committee will adopt a cautious stance.

The analysts said there was a reversal in reforms process, including in the energy sector, taxation and privatisation after the country successfully completed the IMF’s extended fund facility programme.  

Government borrowing from the central bank shot up almost sixfold in July, indicating a major shift in public sector debt pattern. The State Bank of Pakistan’s data showed that the government borrowing swelled to Rs786 billion from July 1 to July 29 as against Rs113 billion in the same month of the last fiscal year.

However, the government repaid Rs524 billion in debt to the commercial banks in July compared with Rs69 billion in the corresponding month of the last fiscal year.

Yields on market treasury bills and Pakistan investment bonds largely remained unchanged during the last two months, indicating a status quo.