Its 100bps increase to 9.75 percent! Forward guidance is also much clearer: “end goal of mildly positive real interest rates is closed to being achieved; while monetary policy settings to broadly remain unchanged in the near-term”. The writing is clear: expect no change in January 2022. There is room for 25-50 bps by March 2022, especially if current account deficit doesn’t start tapering off in the second half of the fiscal. MPC has also taken notice of the significant increase in cut-off yields.
Overall, it is a balanced policy decision which attempts to calm market uncertainties. Inflation forecast has been revised up to 9-11 percent for the ongoing fiscal year. 12-month forward looking inflation forecast seems be around 9-10 percent, considering that “mildly positive real rates are close to being achieved”.
The signaling is in the right direction. For past several months, market rates are diverting from SBP’s. Last increase of 150 bps surprised market participants, especially given earlier forward guidance. Now, SBP must rebuild its credibility in the market by being consistent and following through on its forward guidance. Nonetheless, yields will soon climb down, and cut-off yields may be lower in today’s auction where target is of Rs1.4 trillion. Let’s see how close these would come to the policy rate. Ideally, 3M paper yield should not be more than 50 bps higher to policy rate i.e., 10.25 percent after yesterday’s increase.
The critical number to watch in Pakistan is the current account deficit. SBP revised its forecast to 4 percent of GDP or around $13 billion. It is already at $5.1 billion in Jul-Oct and including Nov, the toll could reach $7.75 billion. Target deficit indicates that the central bank expects faster tapering off during the second half. The inherent assumption is that international commodity prices shall taper off, and import demand shall moderate.
Since September, policy rate has been increased by 275 bps. Currency has also depreciated by 16 percent from its peak level. Additional taxes planned along with end in sales tax exemptions will offer further impetus. All these factors would contribute towards demand tapering. Monetary transmission takes time. Imports are expected to peak in November and shall remain high till December. From January onwards, impact of tightening and fiscal contraction should start showing up. If that doesn’t happen, some action might be warranted by March policy meeting.
The story of inflation may turn out a little differently. Here, analysts are reading too much into the monthly numbers and expecting high yearly numbers in the next few months due to the high base. Inflation readings are likely to be in double digits till July or August 2022. After that, it may start tapering off. The key is to look at monthly increases, and if these are not high, monetary policy may not be too quick in responding to them.
The key is global commodity prices – primarily oil. In order to bring these down, global central banks have sought to be hawkish. Multidecade high inflation numbers are coming from the US to Germany and India. The world is realizing that global inflation is not transitory. Let’s see how central bank decides and how markets react. Pakistan is at the receiving end. No change for now. Wait and see till March 2022.
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