The State Bank of Pakistan (SBP) will announce its Monetary Policy Statement (MPS) on Saturday (May 17, 2014) for the next two months amid market expectations of a cut in the key policy rate. "After a gap of 6 years, Pakistan''s economy has shown clear signs of improvement and this is evident by private sector credit and LSM growth, booming property and stock markets, etc," analysts said.
With lower inflationary risk, a cut in discount rate will provide the necessary push to the already improving business environment and GOP growth, they added. They were of the view that SBP should place higher weight on falling inflation and better external position so that economy could reap the benefits of positive sentiments.
"Less than 9 percent average CPI for FY14 (far lower than SBP initial estimate of 11-12 percent), strengthened local currency (up 7 percent in Mar 2014 alone), rising forex reserves reaching 14-month high and record high spreads between government paper and inflation justify rate cut," said Zeeshan Afzal, an analyst at Topline Securities.
Whether SBP will announce a cut in May or later, we believe policy rate in Pakistan should go down by 50-100bps in next 12 months, he added. "Those who believe that rates will not decline in upcoming MPS base their argument on; firstly, upcoming budget that may fuel inflation as govt plans to further reduce subsidies especially on energy prices and, secondly, the IMF pressure," he mentioned.
Regardless of increase in power rates in the upcoming budget, it is believed that average inflation in FY15 may range between 8-10 percent supported by a stable Pak rupee, Zeeshan said. Khurram Shahzad, CIO Lakson Investment, said that with strengthening forex reserves, limited government borrowing and controlled inflation, the market is expecting a rate cut of 50-100 basis points in the next policy.
He said that initially the central bank was expecting 11-12 percent CPI for June 2014, however, inflation is gradually easing and being expected to be in the range of 8.8 to 9.5 percent in FY14. Presently, the country''s economy is performing well with a healthy GDP growth and at this stage private sector may need more lending requirement in the near future to continue this momentum, he said and added "we believe that at this stage SBP can cut interest rate by at least 50 basis points to facilitate the private sector."
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