AGL 38.00 Increased By ▲ 0.01 (0.03%)
AIRLINK 210.38 Decreased By ▼ -5.15 (-2.39%)
BOP 9.48 Decreased By ▼ -0.32 (-3.27%)
CNERGY 6.48 Decreased By ▼ -0.31 (-4.57%)
DCL 8.96 Decreased By ▼ -0.21 (-2.29%)
DFML 38.37 Decreased By ▼ -0.59 (-1.51%)
DGKC 96.92 Decreased By ▼ -3.33 (-3.32%)
FCCL 36.40 Decreased By ▼ -0.30 (-0.82%)
FFBL 88.94 No Change ▼ 0.00 (0%)
FFL 14.95 Increased By ▲ 0.46 (3.17%)
HUBC 130.69 Decreased By ▼ -3.44 (-2.56%)
HUMNL 13.29 Decreased By ▼ -0.34 (-2.49%)
KEL 5.50 Decreased By ▼ -0.19 (-3.34%)
KOSM 6.93 Decreased By ▼ -0.39 (-5.33%)
MLCF 44.78 Decreased By ▼ -1.09 (-2.38%)
NBP 59.07 Decreased By ▼ -2.21 (-3.61%)
OGDC 230.13 Decreased By ▼ -2.46 (-1.06%)
PAEL 39.29 Decreased By ▼ -1.44 (-3.54%)
PIBTL 8.31 Decreased By ▼ -0.27 (-3.15%)
PPL 200.35 Decreased By ▼ -2.99 (-1.47%)
PRL 38.88 Decreased By ▼ -1.93 (-4.73%)
PTC 26.88 Decreased By ▼ -1.43 (-5.05%)
SEARL 103.63 Decreased By ▼ -4.88 (-4.5%)
TELE 8.45 Decreased By ▼ -0.29 (-3.32%)
TOMCL 35.25 Decreased By ▼ -0.58 (-1.62%)
TPLP 13.52 Decreased By ▼ -0.32 (-2.31%)
TREET 25.01 Increased By ▲ 0.63 (2.58%)
TRG 64.12 Increased By ▲ 2.97 (4.86%)
UNITY 34.52 Decreased By ▼ -0.32 (-0.92%)
WTL 1.78 Increased By ▲ 0.06 (3.49%)
BR100 12,096 Decreased By -150 (-1.22%)
BR30 37,715 Decreased By -670.4 (-1.75%)
KSE100 112,415 Decreased By -1509.6 (-1.33%)
KSE30 35,508 Decreased By -535.7 (-1.49%)

The genie is coming out of bottle. One of the IMF pre conditions of market based exchange rate is already manifested. Now it is time for interest rates in today's MPS announcement. The buzz in the market is about 100-200 bps increase in policy rate. There are no demand based pressures and even cost push inflation is not really a case based on recent numbers. Yet the word is that, since it is committed to the IMF, it is happening.

It could be a self fulfilling prophecy, as market is expecting a rate hike and secondary market yields are adjusting to the reality. This could become reality to bring certainty in the money market. If the decision is based on current inflation, there is no need of further hike.

The headline inflation is at 8.8 percent and the core inflation stood at 7 percent in April. The 12-month moving average of CPI and core is at 6.6 and 7.9 percent, respectively. This is implying that the core inflation is decreasing while the headline inflation is on the rise. Tightening of 475 bps since Jan-18 is surely curbing demand, but currency adjustment amid higher oil prices are pushing headline up.

Not much can be done by monetary tightening - an instrument to suppress demand, and not to counter cost push inflation. Thus, seeing this, a policy rate of 10.75 percent is high enough to curb inflation. Someone may say that the inflation is going to move up in months to come due to increasing international oil prices (passing of it to consumers is probably a condition of IMF), imported inflation due to currency adjustment, energy prices and new taxes or ending tax exemptions. Hence, to counter future inflation, interest rates should go up.

Yes, inflation may go up, and that primarily would be cost push, and may not be too much. In case of energy, electricity prices hike may not be too inflationary in nature. The industrial or agriculture increase is not part of CPI, and the consumer CPI is divided into six slabs and only two are above 300 units. The gas price inflation is already higher than actual in the last increase, hence, any hike now should largely be adjusted within it.

The catch is in fuel prices which are to increase due to both currency depreciation and higher oil prices. The government does not have room, under IMF, to not pass any of the increase. Then the currency fall in itself brings inflation. The REER is almost at equilibrium and theoretically any further devaluation would have higher inflationary consequences than what was the case in past 18 month adjustments.

In short, fundamentals do not warrant increase in discount rate. The only question is what has been agreed by the Infill anchor the decision. In IMF press release, there is no clear mentioning of monetary tightening as a pre condition. On the other hand, other adjustments are explicitly stated.

If this reading of IMF statement is correct, the increase should be between 0-100 bps. Whatever is the decision today, the direction would be clear. Lower increase would be beneficial for the stock market. The FM is inclined to bring market in green to boost confidence as opposition is hitting hard to destabilize the government.

Copyright Business Recorder, 2019

Comments

Comments are closed.