Monetary policy: experts expect 100bps hike in policy rate

Market experts expect a 100bps increase in the key policy rate in the upcoming Monetary Policy Committee (MPC) meeting of the State Bank of Pakistan (SBP), currently scheduled for January 23 (Monday).

“We expect the SBP to increase the policy rate by 100bps to 17% in the upcoming monetary policy,” said Arif Habib Limited (AHL) in a report on Monday.

The brokerage house said money market yields have increased since the last MPC, thus suggesting another hike in the upcoming meeting.

“If we look at the shape of the yield curve to extrapolate markets’ expectations for monetary policy, we see that the secondary market yields since the last monetary policy of Nov’22 have increased to 16.97% | +119bps (3M), 17.01% | +122bps (6M) and 17.06% | +126bps (12M). It can be assumed that the market too, expects the SBP to increase the policy rate in the upcoming policy,” said AHL.

PKR declines in all the five sessions

Topline Securities, another brokerage house, also said it expects a 100bps hike in the policy rate citing high inflation rate and dwindling foreign exchange reserves.

“We think that policy rate will increase by 100bps in the upcoming monetary policy. However, if inflation rate does not fall and external issues persist, further rate hikes cannot be ruled out,” said Topline in a report published on Saturday.

Since the last MPC meeting, CPI inflation has increased to 24.5% in December 2022 as compared to 23.8% in November 2022.

“Given supply side disruptions and increase in prices of certain food items during last few weeks, inflation in the near term is expected to remain on higher side,” said Topline Securities.

Meanwhile, AHL echoed similar views saying that the phenomenon of higher headline inflation is likely to continue in the near term “with pressure mainly emanating from any further energy tariff hikes, weaker currency against the greenback and surge in food prices”.

Foreign exchange reserves have dropped to $4.3 billion, down by $3.1 billion from Nov 25, 2022 (since last MPS), barely an import cover of 1-month. “This is due to huge debt repayments & slowdown in foreign inflows,” said Topline.

Last year in November, the MPC of the central bank raised the key interest rate by 100bps, taking it to 16%, the highest since 1998-1999.

Back then, majority of participants had anticipated the central bank to maintain status quo at 15%.

"This decision reflects the MPC’s view that inflationary pressures have proven to be stronger and more persistent than expected. It is aimed at ensuring that elevated inflation does not become entrenched and that risks to financial stability are contained, thus paving the way for higher growth on a more sustainable basis," the MPC was quoted as saying in the monetary policy statement.

The policy rate has been raised by a cumulative 900 basis points since September 2021.

Meanwhile, JPMorgan, a leading global financial institution, has also penciled in an interest rate hike of 400 basis points by the end of fiscal year 2023 (June 30).

“In our view, if policy orthodoxy against inflation returns and stays, the SBP remains behind the curve based on their historical reaction function. We now pencil in another 400bps of hikes, bringing the policy rate to 20% by end-FY23," JPMorgan had said in a report in early December.