The State Bank of Pakistan (SBP) is most likely further tighten the monetary policy stance by increasing policy rate by 50-100 basis points (bsp) to curb aggregate demand and ensure microeconomic stability. The Monetary Policy Committee (MPC) of the State Bank will meet on Monday, May 20, 2019 for deliberation on key economic issues to take a decision on policy rate. Newly appointed Governor SBP, Reza Baqir will chair the meeting of the committee.
The State Bank has adopted a tight monetary policy since May 2018 aimed at controlling liquidity, rising inflation and widening current account deficit. In the previous monetary policy announced in March 2019, the monetary policy committee increased the policy rate (target) by 50 bps to 10.75 percent for sustainable growth and macroeconomic stability.
The State Bank is most likely to further tighten the monetary policy stance as underlying inflationary pressures is continued to grow, the fiscal deficit and current account deficit is still elevated and the country's foreign exchange reserves are gradually depleting.
The balance of payment crisis has already compelled the government for support from friendly countries in the shape of soft loan and another program from International Monetary Fund (IMF) amounted to $6 billion.
Most of economists are of the view that the SBP would announce further hike in the key policy rate in order to curb aggregate demand and ensure near-term stability, besides control the rising inflation.
Muzammil Aslam, an economist, said that upcoming monetary policy to be announced earlier than scheduled time, indicating SBP is prepared to fulfill prior conditions. "We are entering into an IMF program, market anticipating a rate hike, as IMF standard recipe is to keep real interest rates in positive territory," he added.
The earlier announcement has already given the signal of rate hike, however it is hard to predict exactly how much rate hike will be announced, Muzammil said.
Muhammad Suhail of Topline said that the market is estimating an increase of 100 basis points (bsp) on higher inflation expectations.
Samiullah Tariq, an economist at Arif Habib, also predicted some 100 bps increase in key policy rate in the upcoming monetary policy to be announced on Monday. "With the currency devolution, it seems that the SBP would take steps to preempt second round of inflation and compress the domestic demand," he added.
It may be mentioned here that cumulatively, MPC has increased the policy rate by 4.25 percent during this fiscal year. In July 2018, the committee decided to increase the policy rate by 100 bps from 6.50 percent to 7.50 percent effective from 16 July 2018. With effect from 1st October 2018, the committee raised the SBP target policy rate by 100 bps to 8.50 percent.
The SBP policy (target) rate was increased by 150 bps to 10.00 percent effective from 3rd December 2018. In addition, with effect from 1st February the MPC decided to raise the policy rate by 25 bps to 10.25 percent. While, in the last policy announced in March, the committee increased the policy rate by 50 bps to 10.75 percent effective from 1st April 2019.
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