3rd successive hike: SBP increases key interest rate by 100 basis points, takes it to 9.75%

The State Bank of Pakistan's (SBP) Monetary Policy Committee (MPC) has raised the key interest rate by 100 basis points, taking it to 9.75%.

This is the third successive interest-rate increase since September 2021. In the previous announcement, the MPC raised the rate by 150 basis points.

Majority of analysts and market participants expected the SBP's MPC to increase the interest rate to the tune of 100 basis points or over.

The interest-rate hike expectation stemmed from a number of factors including inflation, widening current account deficit, and the rupee's fall.

The central bank raised the interest rate in the previous two MPC meetings with the first rate hike of 25 basis points, followed by another, more aggressive, 150 basis points.

MPC statement

“At today’s meeting, the MPC decided to raise the policy rate by 100 basis points to 9.75 percent,” read the MPC statement.

“The goal of this decision is to counter inflationary pressures and ensure that growth remains sustainable.”

The MPC noted that since the last meeting on 19th November 2021, indicators of activity have remained robust while inflation and the trade deficit have risen further due to both high global prices and domestic economic growth.

It added that recent data releases confirm that the emphasis of monetary policy on moderating inflation and the current account deficit remains appropriate.

“Following today’s rate increase and given the current outlook for the economy, and in particular for inflation and the current account, the MPC felt that the end goal of mildly positive real interest rates on a forward-looking basis was now close to being achieved.

“Looking ahead, the MPC expects monetary policy settings to remain broadly unchanged in the near-term.”

The statement added that economic growth this fiscal year is expected to be close to the upper end of the forecast range of 4-5 percent.

“This projection factors in the expected impact of today’s interest rate decision.”

Meanwhile, the MPC added that the emergence of the new Coronavirus variant, Omicron, poses some concerns, but at this stage there is limited information about its severity.

It also projected the current account deficit at around 4 percent of GDP, “somewhat higher than earlier projected”.

Separately, the MPC stated that despite a moderation in consumer loans, overall credit growth has remained supportive of growth.

“Meanwhile, across all tenors, secondary market yields, benchmark rates and cut-off rates in the government’s auctions have risen significantly. The MPC noted that this increase appeared unwarranted.”

It also expected inflation inflation to average 9 – 11 percent this fiscal year.

Background

Most analysts expected further monetary tightening in the MPC meeting as inflationary pressure increases. Pakistan reported inflation at 11.5% in November, an almost two-year high.

AKD Securities anticipated a policy rate hike to the tune of 125-150bps.

“The policy setting is likely to weigh upon buildup in trade deficit (November 21 at $5.0bn) along with surprise in inflation during the previous month. Moreover, potential disbursement of direct subsidy under Ehsaas program and its implication on money supply is another factor warranting consideration in our view,” stated AKD Securities in its latest report.

“Initial prints relating to latest trade numbers suggest contributors to persist at least in the near term amid delays in immediate fiscal adjustments and lagged nature of impact of recent downtick in commodities on import bill. The same is also reflected in the FX market where PkR/US$ touched historic lows at 177.6 despite materialisation of $3bn in deposits from Saudi Arabia,” it added.

Similarly, Topline Securities also anticipated a rate hike of 100-150 bps in the meeting. “We also expect SBP to revise upwards its inflation and current account estimates,” it said.

Furthermore, a poll conducted by Capital Stake found that 66% of the respondents expected policy rates to rise by 100 bps or more.

SBP prepones monetary policy announcement, will now hold it on November 19

In previous meeting, the SBP also decided to increase the number of MPC meetings from six to eight times a year. The next meeting will now be held on January 24, 2022.

The schedule for the next four MPC meetings is as follows:

1. January MPC meeting: Monday, 24th Jan 2022

2. March MPC meeting: Tuesday, 8th Mar 2022

3. April MPC meeting: Tuesday, 19th Apr 2022

4. June MPC meeting: Friday, 10th Jun 2022