The SBP increases the Policy Rate by 100bps
News Report
State Bank of Pakistan (SBP) on Tuesday increased the Policy rate by 100bps to 9.75% in Pakistan.
SBP in its latest Monetary Policy Statement (MPS) hiked the Policy Rate by 100bps to 9.75% from 8.75%, taking a cumulative increase to 275bps over the last three months.
This follows the market’s expectations. But some quarters in the market were expecting an increase of up to 150bps.
MPC views risks related to inflation and increases in the balance of payments, while the outlook for growth continued to improve.
The SBP has increased its Current Account Deficit (CAD) estimate for FY22 to 4% (i.e. US$13bn) against 2-3% previously.
It also now expects inflation to average between 9-11% in FY22, compared to its previous estimate of 7-9%.
GDP growth is likely to be close to the upper end of 4-5% in FY22.
The MPC feels that the end goal of mildly positive real interest rates on a forward-looking basis was now close to being achieved.
MPC expects monetary policy settings to remain broadly unchanged in the near term.
The committee reiterated that the end goal of mildly positive real interest rates remains unchanged. Given the recent interest rate move, it expects to take measured steps to that end.
We expect up to a 50bps increase in Policy Rate in 1Q2022, where global commodities prices will continue to dictate monetary policy settings, Topline Research said in its note.
The IMF program is on track, and the government is taking necessary measures to meet the program’s prior actions. The Executive Board meeting is likely on Jan 12, 2022.
The SBP expects full force of the demand moderating actions taken by the Central Bank.
The government’s tightening of fiscal policy will help bring down inflation in the 2H2022. Inflation is unlikely to average in double-digits in 2022, it said.
The inflation and CAD are likely to remain on the higher side in the near term. The MPC has already factored it in its analysis.
Overall, higher global prices account for around 70% of the increase in imports in this fiscal year.
The exchange rate has taken most of the brunt in recent times. But with other tightening policies coming into play now, the outlook for exchange rate is better.
The available financing in FY22 is more than enough to meet gross external financing requirements. This assumes the resumption of the IMF program.
Donors had agreed to roll over most of the bilateral loans, particularly those coming from China.
The MPC also noted that, across all tenors, secondary market yields, benchmark rates, and cut-off rates in the government’s auctions rose.
It further observed this increase appeared unwarranted. There are many options with the SBP to check these abnormalities.
But it hopes such actions will not need as clarity has been provided on future monetary policy settings.
The private sector credit growth has picked up, with the contribution from SBP schemes diminishing. Auto finance and personal loans are moderating.