State Bank of Pakistan is scheduled to review the current state of the economy and announce its key policy rate on Monday.

Financial experts have developed consensus that the bank will maintain the rate at the current level of 15% for the next seven weeks.

Commercial banks, however, expect that the State Bank of Pakistan’s (SBP) monetary policy committee (MPC) will increase the rate – probably by 100 basis points – considering the weekly inflation has hit a record high of over 42% in the week ended on Friday and the benchmark CPI inflation spiked to a 14-year high at around 25% in July. The inflation is anticipated to increase further amid a continuous increase in energy prices in the country, while the policy rate is a tool available with the central bank to control inflation.

Moreover, one cannot overlook the central bank’s aggressiveness to control high inflation through a hike in the policy rate. The bank increased the rate by 125 basis points in its last meeting in July to 15%, though a majority of pundits had developed consensus on a 100-basis- point increase, while a minority section of analysts had anticipated that the central bank would maintain the status quo.

The key policy rate, also known as the benchmark interest rate, remains a tool available to central banks around the world to create a balance between inflation reading and economic growth.

Most of them (including the SBP), however, have maintained the real interest rate (policy rate minus inflation) in the negative territory since the outbreak of Covid-19 pandemic to ease economic hardships.

Analysts, who think the rate will remain unchanged on Monday, said the uptrend in inflation was mostly due to an increase in energy prices, which was made to win back the IMF loan programme.

“The supply-side inflation (price hike) cannot be controlled through the hike in interest rate. Therefore, another hike will unnecessarily slow down economic activities, which are not required anymore at least at present,” Ismail Iqbal Securities Head of Research Fahaf Rauf said.

The central bank can only control demand-side (demand-hike) inflation by increasing its policy rate. Moreover, the central bank has already achieved its objective of cooling down demand in the then overheated economy through significant hikes in the rate in the past, he said.

The central bank has increased the benchmark interest rate by a cumulative 800 basis points in the past 11 months (since September 2021) to 15% on July 7, 2022.

Almost all the industry sales numbers are on a declining path. Sales of automobiles, petroleum products, electricity, cement and fertilisers went down significantly in July. “The central bank will maintain the rate at the current level to stabilise the economy,” he said.

Pakistan has apparently achieved one of the two major objectives of the higher policy rate. Imports have been cut down sharply to $4.9 billion in July 2022 through policy measures compared to $7.7 billion in June 2022.

“The significant reduction in imports suggests the objective of controlling current account deficit has been achieved in July 2022,” Pak-Kuwait Investment Company Head of Research Samiullah Tariq said.

The second major objective was to control inflation. “The ongoing ease in global commodity prices is expected to push down the imported inflation in Pakistan,” he said.

The central bank would most probably not change the rate for now. “It would wait to see the lagged impact of its measures including the monetary tightening in the past,” he said.

“It if feels the need for another hike in the rate, it may do so in its October 10, 2022 meeting.”

SBP Deputy Governor Murtaza Syed would chair the meeting, the central bank confirmed.

Earlier, the government appointed Jameel Ahmed as the new governor of the bank for the next five-year term.

Taurus Securities Head of Research Mustafa Mustansir added that pressure on the rupee against the US dollar had subsided significantly with “Pakistan inching closer to the next IMF disbursement as well as enhanced monitoring of exchange operations by the SBP.”

The yields on T-bills and Pakistan Investment Bonds (PIBs) in the primary market have remained almost unchanged since the last MPC announcement in July 2022 … and “do not seem to reflect expectations of another rate hike for now,” he said.


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