The monetary policy is going to be announced coming Monday (30th October 2023). The rational choice of analysts is “no change” – evident in surveys conducted by CFA Society and brokers. However, the sentiment of some rational thinkers is that there is going to be a rate cut of 100 bps. The consensus view is that the rates have peaked and the policy rate will be lower by at least 400 bps from prevailing 22 percent by June 2024.

The markets are showing exuberance. The money markets have incorporated 100 bps cut on Monday. The secondary market yields of 3–12-month papers are at 21.7-22.8 percent while the discount rate is at 23 percent. The 6M KIBOR is trading at 100 bps below the last five month average. And the stock market has perhaps already incorporated the 400-bps cut by June.

Markets are forward looking, and they have a clear view that the cycle is peaked and the rates will move downward from now onwards. There were some voices of rate hike in the last policy review, and it’s hard to find someone with a similar view, today. The only question is: when will the SBP start slashing rate?

Well, it’s better for SBP to tread with care. The IMF review is going to start soon, and there are early signs of pressure on the currency in the interbank market. And the last headline inflation recording was at 31.4 percent – almost 10 percent higher than the policy rate, and the real rates on spot inflation are likely to remain positive till January 2024. SBP must give some regard to this trend.

IMF certainly would not be happy with no change in the last policy and administrative measures of crackdown on smuggling to bring improvement in the PKR. Although, all the quantitative targets for the upcoming reviews are being met, and most awaited gas pricing structural reform to curb the flow has been done. Still, its better to not be dovish in the monetary policy stance.

There are pressures being put on the currency market. The PKR appreciation in the past few weeks was mainly due to excessive forward selling by exporters and slow demand from the importers. Both exporters and importers wanted to maximize the benefit of one-rupee a day currency uptick. Now the currency market is in a consolidation phase. Exporters are no where to be found (as mostly have already sold Nov sales in forward) and importer is coming to clear their pending documents. There is no significant uptick in remittances after the convergence of interbank and open market rates.

Thus, for the currency to remain stable, it’s imperative for PKR holding to remain attractive.

The CPI core is inching up and the last recording was at 22 percent which is the peak of this cycle (so far). The second-round impact of inflation is in place. Yes, the inflationary expectations are taming down, as visible by the CFA Society survey where 98 percent of participants expect no change or a rate cut, and 68 percent expect rates to be down to below 20 percent by June. Still, it’s better to have a wait and see stance on Monday.