Upcoming monetary policy: majority polled expect no change in key interest rate

A majority of market participants expect status quo – no change – in the upcoming monetary policy announcement by the State Bank of Pakistan (SBP), which is currently scheduled to be held on August 22, according to a poll conducted by brokerage house Topline Securities.

Topline, which itself expects the SBP to keep the policy rate unchanged at 15%, conducted a poll in which it took feedback from market participants on expectations over the Monetary Policy Statement (MPS).

“We think the rate will remain unchanged in the upcoming monetary policy. We can see a decline in policy rates in 2HFY23,” said Topline.

SBP increases key interest rate by 125 basis points, takes it to 15%

As per its survey, 56% of the participants expected no change in the policy rate. Around 43% of the participants anticipated an increase whereas 1% even saw a decrease in the policy rate.

Moreover, on their view about the policy rate by the end of FY23, 45% of the participants expected the policy rate to be in the range of 12.01% to 14%, and 5% of the participants anticipated it to be in the range of 10%-12% by June 2023.

“In terms of outlook for the Current Account Deficit (CAD), 39% of the participants expected CAD to be below $9 billion in FY23 while the remainder expected CAD to be higher than $9 billion in FY23," it said.

Last month, the central bank increased the key interest rate by 125 basis points, taking it to 15% amid the expectation of further tightening due to a higher inflation outlook.

Furthermore, the SBP linked the interest rates on Export Finance Scheme (EFS) and Long-Term Financing Facility (LTFF) to the policy rate to strengthen monetary policy transmission, while continuing to incentivise exports by presently offering a discount of 500 basis points relative to the policy rate.

Extended Fund Facility: Pakistan receives Letter of Intent from IMF

Meanwhile, Topline said that since the last monetary policy announcement, expectation of improvement in external account has increased as Pakistan signed the staff level agreement with the International Monetary Fund (IMF) and its board is likely to approve a tranche of nearly $1.2 billion.

It added that due to government's measures, imports in July 2022 posted a decline of 38% MoM to $4.9 billion, which translates into a 47% lower trade deficit in July 2022.

Intra-day update: Rupee continues to appreciate, hovers around 215

Consequently, the Pakistani rupee also started strengthening after hitting its all-time low of nearly Rs240 on July 28, 2022, in the inter-bank market. Since then, it has strengthened to around Rs216.

“These positive news flows have increased prospects of status quo in upcoming monetary policy,” Topline added.

On the other hand, some analysts have said that a rate-hike, although less likely than before, could also be in the offing as Pakistan reported a headline inflation number of 24.9% in July, a 14-year high.