Record inflation, but market says status quo in upcoming monetary policy

Despite record inflation that hit a fresh high of 38% in May, market experts say they believe the State Bank of Pakistan (SBP) is unlikely to revise the key policy rate in the upcoming Monetary Policy Committee (MPC) meeting scheduled to be held on June 12, 2023.

“Pakistan’s inflation reached a record high in May but that’s unlikely to prompt the central bank to raise rates further in June,” wrote Ankur Shukla, a South Asian economist, for Bloomberg on Friday.

“We think this reading marks the peak and high base effects from a year earlier should push inflation back down from this month.

“With real rates having turned positive on a 12-month forward-looking basis, the SBP has already likely lifted rates high enough and should wait and see the impact of its previous tightening, in our view,” wrote Shukla.

In its previous meeting on April 4, the MPC raised the key policy rate by 100 basis points, taking it to 21%.

MPC to meet on 12th

Similar sentiments were expressed by Arif Habib Limited (AHL) in its report on Saturday. The current policy rate is “already raised to a considerable level”, the brokerage house said.

“High-interest rate along with other macroeconomic measures have already put the brakes on economic growth, as evident from the recently released provisional GDP growth number of 0.29% for FY23,” it said.

AHL said that the country’s industrial sector registered a negative growth of 2.94% in FY23, “which can primarily be attributed to the impact of tight macroeconomic policies and higher cost of doing business, exerting downward pressure on aggregate demand”.

“Therefore, the idea of further increasing interest rates would only raise risks to the overall growth and increase economic woes,” it said.

The brokerage house believed that raising policy rate further would not control inflation.

“We believe further raising interest rates may not effectively address the root causes of rising inflationary pressure and therefore, adopting a holistic approach would be required to ensure a well-rounded strategy,” said AHL.

The brokerage house expects monetary policy easing to begin in the latter half of the upcoming fiscal year (FY24), with possibility of 400-500bps reduction in the policy rate.

Meanwhile, Ankur Shukla of Bloomberg expected inflation to remain elevated in the coming months on account of high food prices and the weak currency which is making imports expensive.

“We expect inflation to average 29% in fiscal 2023 and 24% in the year starting July,” wrote Shukla.

However, “there is an upside risk to our inflation and rates forecasts if the aid from the International Monetary Fund (IMF) does not arrive and rupee falls,” said the economist.

Aside from Shukla, who expects the SBP to keep policy rates on hold at 21% through December, Topline Securities, a brokerage house, “also expected no change in the upcoming MPC meeting”.

As per Topline’s survey, 69% of the participants expect no change in policy rate, while 23% expect an increase.

Out of the ones that expected an increase, almost two-thirds see a 100bps hike, while the remaining predicted an over 100bps increase .

Only 8% of participants expect a decline in policy rate.

On inflation, Topline said the CPI inflation is expected to soften from June 2023 and gradually decline over the next 12 months majorly because of base effect along with tight monetary and fiscal policy.

In April, Pakistan’s central bank raised its key interest rate to a record 21% as the cash-strapped country bid to curb crippling food inflation and maintain the confidence of foreign creditors.

“The MPC noted that inflation in March 2023 rose further to 35.4%, and is expected to remain high in the near term,” it said in its statement back in April.

“However, there are early indications of inflation expectations plateauing, albeit at an elevated level. The MPC views today’s decision as an important step towards anchoring inflation expectations around the medium-term target, which is critical for achieving the objective of price stability. The MPC further observed that Pakistan’s financial sector remains broadly resilient, while economic activity continues to moderate.”