Status quo is our best friend. All the ten market participants BR Research spoke to regarding the monetary policy due tomorrow, called for no change. And if you have been reading the policy statements in good detail, the market response should not come as a surprise. And in all honesty, there is still room for the SBP to persist with the current policy rate. Mind you, last time, one member even suggested cutting the rate.
The story has not changed much since the last monetary policy. Inflation continues to be under 4 percent, and that is what receives the biggest consideration from the SBP while deciding on the policy rate. Banks, NBFIs and stock brokers are also of the view that there appears no reason for the policymakers to alter the interest rates in either direction.
And the treasury market movements of late seem to validate the notion that the SBP would want to continue with the existing rates. The liquidity in the market is high, and investors have been eager to invest. The yields did rise after the last policy announcement, on account of having bottomed out, but that proved to be not more than a technical correction. Government has been rejecting bids in PIBs, signaling it is no mood to tinker the rate.
Yes, the current account deficit has soared to alarmingly high levels, and there appears no respite to the way imports have jacked up of late. Yet, the twin deficit alone may not be reason enough for the SBP to change the rate just for the sake of it, when in fact; there is ample room available when seen from the CPI angle.
There is also some good news on the CSF front and Pakistan may eventually receive the long overdue $700 million, which should ease some nerves from the balance of payment perspective. Also the fact that the government is all set to fetch money from the international bond market, offers more cushion to reserves.
That said, the committee would do well to at least advocate a better trade balance. Granted, it is not the mandate of the monetary policy committee to be taking policy decisions on such matters, but a little advocacy would not hurt. Just because the unlimited import growth has not yet translated into high inflation, does not mean it will not in the future. That Pakistan needs to use more import curbing mechanism by pricing aggressively, is well known, and the sooner it is, the better.
The minutes of the previous MPC clearly state that uncertain global oil prices pose a major risk to inflation. Mind you, bulk of the import growth has been without a massive hike in oil prices. All this cushion and room for maintaining the policy rate, and near four months import cover could vanish in a blink, if more is not done to curb imports. And the MPC must play its role too. For now, all fingers point towards status-quo.
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