The State Bank of Pakistan (SBP) is likely to maintain status quo in today''s monetary policy ahead of expected surge in inflation. The State Bank will announce monetary policy today (Saturday) for next two months. After meeting of the Advisory Committee on Monetary Policy, State Bank''s Board of Directors will deliberate on the key economic issues for a final decision on the interest rate. In the previous policy announced in September this year, the SBP cut the key policy rate by 50 basis points to 6 percent.
Analysts have divergent views about the upcoming decision on monetary policy and a debate is raging about maintaining the policy rate at current level or cut in rate, however most of the analysts are expecting that SBP may adopt wait and see policy by maintaining policy rate at 6 percent. Analysts are expecting some surge in inflation in coming days ahead of correction in oil prices in the world market. "Although, presently, sluggish oil prices continued to dictate CPI at averaging 1.6 percent YoY in first four months of this fiscal year, however, it is being expected that inflation numbers will pick up from current levels, due to bottoming out of oil prices in second half of CY16, low CPI base effect and increase in food inflation as witnessed in the weekly SPI of key food items," they added.
Muhammad Suhail of Topline said that expected inflation growth will be backed by low base as inflation is continually on decline from December 2014. In addition, Pak rupee is likely to remain under pressure, besides some correction in oil prices in the world market. "Ahead of these sentiments we are expecting that SBP may keep the policy rate unchanged at 6 percent for next two months," he added. According to Shiraz Zaidi of Arif Habib, Pak rupee has depreciated by 3.9 percent in July-October of FY16, compared to only 2.9 percent in the same period of last fiscal year. The depreciation comes amidst the probability of US Fed rate hike in Dec''15 which will exert further pressure on Pak rupee and other regional currencies, he added.
"While, considering the slow growth in private sector and high real interest rate alone; the SBP may have a small window to cut another 50bps, however; we believe, it may be counterproductive with Pak Rupee undergoing further depreciation," he added. He said that in order to boost economic growth amidst receding inflation, the SBP has already slashed discount rate by 400 bps bringing down the rate to 6 percent in September 2015 from 10 percent in November 2014.
"We expect the central bank to maintain status quo at the current 6 percent due to uptick in CPI inflation and pickup in private sector credit," Zaidi said. Since last monetary policy in Sep''15, cut-off yields on PIBs plunged by 18bps, 19bps, 8bps for 3-year, 5-year and 10-year, respectively in recent auction. Commenting on some decline in margin on long-term government securities, analysts at Investcap Research said that reason behind decline in cut-off yields was that Pakistan Investment Bonds (PIBs) were already trading at lower than the last auction cut-off yields in the secondary market and so it wasn''t a surprise.
The country''s foreign exchange reserves currently stand at $19.8 billion which is an impressive level and expected to grow with release of tranches by IMF and funds from other global financial institutions. "Low inflation numbers, stable economic indicators and depressed spreads of banks are indicating that the central bank will maintain a hold off policy," they said.
Last cut by the SBP in previous MPS has just been absorbed by the market and it would be early for further reduction of discount rate, they said and added that however an unexpected move by SBP of rate cut might also trigger which will resultantly put more pressure on already waning banking spreads.