The State Bank of Pakistan (SBP’s) Monetary Policy Committee (MPC) is scheduled to meet on Friday (Jan 22, 2021), wherein the market analysts expect the MPC to announce “no change” in the benchmark policy rate – for the third consecutive time.

Despite the strong pick-up in aggregate demand as indicated by high-frequency demand indicators, the analysts believe that it may still be premature for the SBP to increase interest rates, as the second wave of COVID-19 continues and the overall economic situation seems stable. Expansionary monetary policy has been vital in supporting economic recovery.

In addition, easing general price level is also expected to support the status quo in monetary policy. The NCPI has declined consistently since October 2020 and is expected to ease further arriving at 7 per cent for January 2021, despite the hike in POL prices. The current trajectory for inflation indicates that average headline inflation is expected to remain within the SBP’s target range of 7-9% for 2020-21.

Nevertheless, the analysts expect the SBP to raise interest rates from the next round of MPC meetings, in order to commence moving towards positive real-interest rates, which will be key in successful negotiations with the IMF and also support the Rupee. Overall, the analysts expect the SBP to increase interest rates by 200-250 bps during calendar year 2021.
Topline Securities conducted a poll of top notch financial market participants over their views on the upcoming Monetary Policy Statement (MPS).

A total of 94 participants took part in the latest poll, compared to 72 in Nov-2020 poll which was conducted for Nov-2020 MPS.
Of the 94 participants, 75% expect no change in the Policy Rate in the Jan 22, 2021 MPS. Around 88% expected no change in Nov-2020 poll.

19% of the participants are expecting an increase in Policy Rate. 10% are expecting an increase of 100-150bps. In last the poll, only 7% of the participants were expecting an increase in Policy Rate, the report said.

With respect to monetary tightening in 2021, 58% of the participants expect monetary tightening to begin in 1H2021 (12% in Jan, 21% in Mar and 25% in May). 26% expect monetary tightening to begin in 2H2021, while 17% do not anticipate a rate hike in 2021.

The analysts at Topline brokerage house are also expecting no change in the Policy Rate in the Jan-2021 MPS, while they expect increase in Policy Rate by 100bps in May/Jul 2021.

The analysts believe the change in views towards an increase in policy rate of the participants is owing to (1) likely restoration of IMF program over next couple of weeks wherein energy tariffs are likely to be adjusted upwards and (2) rising international oil and commodity prices (sugar, scrap, palm oil etc.).

While CPI inflation in Jan-2021 is likely to fall to around 6.0% YoY because of a high base effect, it is likely to come in at 9.5-10.0% during the second quarter 2021, the report added.


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