With inflation running high, majority expects SBP to hike key interest rate by at least 100bps

ISLAMABAD: The State Bank of Pakistan's (SBP) Monetary Policy Committee (MPC) will meet on Thursday (July 7) with many onlookers, analysts, and economists divided over the rate-hike expectations. A snap poll of 10 economists and market watchers conducted by Reuters suggested the SBP may raise rates by 125 basis points at its review.

Acting Governor State Bank of Pakistan Dr Murtaza Syed will hold a press conference on the same day after the MPC meeting, said the SBP.

The market is keenly awaiting the MPC announcement after Pakistan reported its highest headline inflation number since December 2008 for June. Many believe that the central bank would move aggressively in response.

According to the median estimate in a snap poll, Reuters found that the economists, analysts and senior professors surveyed were widely split on the quantum of increase with views ranging from 50 to 200 basis points. Two respondents did not see a need for a rate increase.

At its previous meeting in May, the MPC announced a hike of 150 basis points in the key interest rate.

Previous MPC announcement: SBP raises key interest rate by 150 basis points, takes it to 13.75%

With the current policy rate at 13.75% and inflation running well above, real interest rates in the economy have turned sharply negative.

"The last monetary policy committee statement is proof that the SBP is way behind the curve on anticipating inflation," Yousuf Nazar, an economist who writes for various publications and formerly with Citigroup, was quoted as saying by Reuters.

"Another hike would increase government debt servicing costs as well as hurt industries. It is not going to have much of an impact on exchange rate or overall demand," he added.

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Most believed a hike was inevitable, given persistently high global energy prices, the abrupt ending of fuel subsidies as well as the need to control demand after SBP said in its last policy statement the economy had rebounded much more strongly than anticipated.

"The overall policy mix is geared towards stabilisation and demand management," CEO of Macro Economic Insights Sakib Sherani said, adding that this will induce a sharp slowdown in the economy, possibly a recession, in the short run.

But Fahad Rauf, head of research at Ismail Iqbal Securities, said he does not see the need to increase rates further.

"The economy is already slowing down. The layoffs have started and are expected to increase further. Further cost pressures would only enhance the burden on industries and workers," Rauf said.

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"The fiscal arm is working now, tough measures have been taken. SBP needs to wait for the results before further tightening," he added.

With Pakistan expecting a restart of the much-awaited bailout package from the International Monetary Fund after the country agreed on some tough economic policy adjustments to promote stability, the SBP's decision is being closely watched.

Monetary policy: majority expects at least 100bps hike as inflation highest since Dec 2008

Separately, in a poll conducted by Topline Securities and reported by Business Recorder earlier, majority of financial market participants also expected the policy rate to go up by at least 100 basis points (bps) after the MPC meeting.

In its poll, the brokerage house found that 80% of the participants expected an increase in the policy rate.

“Around 45% of the participants expect the policy rate to increase by 100bps, 30% anticipate an increase of 150bps, while 5% expect an increase of more than 150bps,” it said.

Meanwhile, for the remainder of FY23, 49% of the participants expected an increase of more than 100bps whereas 26% of participants anticipate an increase of 100bps. The remaining participants expect no change or decline in rates in the remainder of the fiscal year.