Monetary Policy Survey; Majority expect No Change in Policy Rate

The majority of people expect that there will be no change in policy rate. SBP’s next Monetary Policy Committee (MPC) meeting will be held on Dec 12, 2023.

To gauge the view on monetary policy outlook, Topline Research conducted a poll of key market participants on expectations over policy rates and key macro estimates.

According to the survey, 63% of participants expect the policy rate to remain unchanged at 22%. While 8% of participants expect it to decrease by 50bps, 19% of participants expect the policy rate to decrease by 100bps, 2% of participants expect it to decrease by 150bps, 6% of participants expect it to decrease by 200bps, and 2% of participants expect it to decrease by more than 200bps. No one expects an increase in interest rates.

In the latest MPC meeting held on Oct 30, 2023, the Pakistan Central Bank, State Bank of Pakistan (SBP), decided to keep the policy rate unchanged at 22%, which came in line with market expectations.

The MPC reiterated its earlier view that the real policy rate is significantly positive on a 12-month forward-looking basis and is appropriate to bring inflation on a downward trajectory, especially in the 2HFY24.

Since the last MPC meeting, new developments have taken place, which will likely be considered by the central bank committee in the upcoming meeting. These include: (1) a rise in CPI inflation for Nov 2023 to 29.2% from 26.8% in Oct 2023, driven by higher gas prices, (2) Pakistan posted a Current Account Deficit of US$74mn in Oct 2023 vs US$46mn in Sep 2023, (3) local fuel (petrol & diesel) prices have declined on average by 3%, (4) International oil prices have declined by around 7%, and (5) the rupee largely remained stable against the US dollar.

Furthermore, cut-off yields in the recent T-Bill auction have declined by 5-7bps, with yields now standing at 21.44%, 21.42%, and 21.43% for 3, 6, and 12 months, respectively. Secondary market yields on 6-Month T-Bill & 3-Years PIBs have decreased by 13bps and 126bps respectively since Oct 30, 2023.

In response to the second question: where do you see the Policy Rate in June 2024, 54% of the participants anticipate the policy rate to be in the range of 18-20%, vs the last survey of 41%. 33% of the participants anticipate the policy rate to be in the range of 16-18%, vs the last survey of 41%.

On the other hand, 6% of participants expect the policy rate to be in the range between 20-22%, and another 6% of participants expect the policy rate to be 14-16%. No one expects the policy rate to be below 14% and above 22%.The majority expect a 200bps increase in the policy rate: Survey

Responding to our question on the PKR/USD parity outlook in the interbank market by June 2024, 38% of the participants anticipate the PKR/USD parity to range between Rs290-310, 31% expect it to be around Rs270-290, and 29% of the participants anticipate it to be in the range of Rs310-330. 2% of the participants anticipate it to be below Rs270. No one expects it to be above 330.

Interestingly, market participants’ views on the dollar parity have changed since the earlier survey conducted on October 20, 2023, where 32% of the participants anticipate the PKR/USD parity to range between Rs280-320, and another 32% expect it to be around Rs300-320. 14% of the participants anticipate it to be in the range of Rs320-340. On the other hand, 19% expect it to be below Rs280, while 3% expect it to be above Rs340.

Considering all the factors mentioned above, we also believe the SBP will keep the policy rate unchanged at 22% in the upcoming MPC meeting, Topline Research said in a note.