The majority expect a 200bps increase in the policy rate: Survey

Staff Report

A majority of people expect a 200bps increase in the policy rate. SBP’s next Monetary Policy Committee (MPC) meeting will be held on the 14th of Sep 2023.

In order to gauge the view on monetary policy outlook, Topline Research conducted a poll of key market participants on expectations over policy rate and key macro estimates.

According to the survey, 54% of participants expect interest rates to increase by 200bps, while 18% of participants expect an increase of up to 100bps in the policy rate.

Additionally, 12% expect interest rates to increase by 150bps, and 10% expect a 300bps increase. Rest 7% expect no change while no one expects an increase in the policy rate by more than 300bps.

In the post-MPC meeting on July 31, 2023, the SBP Governor stated that data-driven policy decisions will be made in the future.

In IMF Country Report, Staff also emphasized a continued tight, proactive, and data-driven monetary policy is warranted going forward.

Since the last MPS, major developments have taken place and new data is now available which will likely be considered by the central bank committee in upcoming MPS.

These include; (1) Pakistan posted a Current Account Deficit of US$809mn in July 2023 after four consecutive months of Current Account Surplus, (2) local fuel (petrol & diesel) prices have increased by around 19%, (3) International oil prices in US$ have risen by 6%, and (4) rupee has fallen by 6% against the US dollar.

Owing to the sharp spike in commodity prices concerns over inflation, and the current account outlook, the cut-off yields in the recent T-Bill auction have increased by 162-213bps, with cut-off yields now standing at 24.5%, 24.8%, and 25.1% for 3, 6, and 12 months, respectively.

Furthermore, secondary market yields on T-Bill & PIBs have increased by 134bps and 110bps respectively since July 31, 2023.

In response to the second question where you see the Policy Rate in June 2024, 31% of the participants anticipate the policy rate to be in the range of 22-24%. 25% of participants expect the policy rate in between 20-22%.

As many as 23% of participants expect the policy rate to fall between 24-26%. On the other hand, 18% of participants expect the policy rate to be below 20% and 3% of participants expect the policy rate above 26%.

In response to the question regarding the expected average inflation for FY24, 34% of the participants anticipate inflation to range between 22-24%. 21% of participants expect inflation to fall between 24-26%, and 18% of participants expect inflation to fall between 20-22%.

On the other hand, 21% of participants expect inflation to be above 26% and 5% of participants expect inflation below 20%. The SBP increases the Policy Rate by 100bps

To recall, Pakistan’s CPI Inflation in Aug 2023 came down to 27.4% YoY vs. 28.3% YoY in Jul 2023 attributed to the high base effect from the last year along with lower food prices.

With the recent increase in local fuel prices along with the rupee devaluation against US dollar, we have revised our inflation estimate upward. We now expect the average inflation for FY24 to be 23%, compared to our earlier estimate of 21%.

However, considering recent developments, we also believe that the SBP may revise their inflation targets upward from the previous range of 20-22% for FY24.

Considering all the factors mentioned above, we expect an increase of 200bps, taking the rate to 24%, in the upcoming MPC meeting.

In response to our question on the PKR/USD parity outlook in the interbank market by June 2024, 38% of the participants anticipate PKR/USD parity to range from Rs320-340 by June 2024,” Topline Research said.

Around 25% expect it to be around Rs340-360 while 21% expect it to be around Rs300-320. On the other hand, 12% expect it to be below Rs300, while 5% expect it to be above Rs360.

We also expect PKR/USD in the interbank market to be in the range of Rs320-340 by June 2024,” reveals research report.