Market divided over extent of interest-rate increase as SBP meets on Thursday

The Monetary Policy Committee (MPC) of the State Bank of Pakistan is set to meet on Thursday (September 14) to announce its monetary policy, and will issue its statement through a press release.

But perhaps, after a while, analysts are united that there will be hike in the key policy rate – its the quantum that has them divided.

After issuing a clarification that there is no emergency meeting on the cards, the SBP also said that it would be premature to forecast the future policy rate.

However, that has not stopped brokerage houses from issuing their predictions on what could happen on Thursday.

The stock market has already felt the heat of a possible rate-hike, and remained under pressure for a few weeks. Back on July 31, when the SBP kept the policy rate unchanged at 22%, the KSE-100 was sitting pretty at over 48,000 points. It has since retreated to 45,590.92 (closing on Wednesday). Of course, there have been other negative news flow along the way – including a widening current account deficit, worsening of the inflation outlook due to an over 20% hike in petroleum prices, decline in remittances, and over 4% depreciation of the rupee despite the minor gains in recent days.

In its July announcement, the MPC stated that economic uncertainty had decreased, whereas near-term external sector challenges have been largely addressed and investor confidence has shown improvement. Its statement was a reflection of the post-IMF euphoria that had many onlookers thinking that good times were here.

However, since then, Pakistan has witnessed protests against massive electricity bills and falling foreign exchange reserves that are back under $8 billion.

Market experts Business Recorder reached out to earlier said they were expecting a rate hike as high as 300 basis points in the key policy rate on account of rising inflationary pressure.

Brokerage house, Optimus Capital, said it anticipated a 100 bps hike in the policy rate. It said the hike would be “due to 1) stubborn inflationary pressures and 2) the risk of 12-month real interest rates (RIR) remaining in negative territory for an extended period”.

“In our view, a steeper hike is unlikely for the following reasons: 1) more hikes would be largely ineffective against cost-push inflationary pressure, 2) the already high debt servicing costs are pressuring fiscal deficits, and 3) industries/businesses are already under distress,” it added.

Arif Habib Limited (AHL) said it expected the SBP to raise the key policy rate by 150bps to 23.5%.

“We believe the SBP might consider increasing interest rates as a precautionary measure to address the persistently high levels of inflation in the country,” said AHL.

Topline Securities, in its report released last week, said it expected the SBP to raise the key policy rate by 200bps to 24%.

As per a survey it conducted, 54% of participants expected interest rates to increase by 200bps, while 18% of participants saw an increase of up to 100bps in the policy rate. Around 12% saw interest rates increase by 150bps, and 10% expected a 300bps increase, while the remaining anticipated no change.

“We also believe that the SBP may revise their inflation targets upward from the previous range of 20-22% for FY24,” said Topline back then.

Background

In its meeting on June 26, the MPC of the SBP had raised the key policy rate by 100 basis points (bps) to 22%, after convening an emergency meeting, to keep the real interest rate firmly in the positive territory on a forward-looking basis.

Back then, it said “certain upward revisions in taxes, duties and PDL rate in FY24 budget” and the SBP’s withdrawal of the general guidance for commercial banks on prioritisation of imports as having increased the “upside risks to the inflation outlook” for the rate-hike.

Following this, central bank decided to keep the policy rate unchanged at 22% in its last MPC held on July 31.

It is pertinent to mention that as part of the International Monetary Fund (IMF) agreement, the government has committed to the Washington-based lender that it stands ready to consider further action in upcoming MPC meetings until inflation expectations are on a clear downward path.

However, despite securing a last-minute deal with the IMF, Pakistan remains engulfed with issues of high inflation, which clocked in at 27.4% on a year-on-year basis in August 2023, and low foreign exchange reserves.