KARACHI: With the central bank preparing to publish its monetary policy next week, economists anticipate the State Bank of Pakistan (SBP) will tighten policy further to combat rising inflation and support the damaged currency, according to The News.
After a worsening prognosis for inflation and a rise in threats to external stability, as well as internal political turmoil, the market awaits the conclusion of the central bank’s May 23 meeting for signals on its policy trajectory.
In an emergency meeting conducted in April, the SBP lifted its policy rate by 250 basis points (bps) to 12.25 percent, the largest increase in years.
“Given worries, growing inflation, and a falling currency,” a Topline Securities analyst said in a research, “we predict SBP to hike the policy rate by 100bps.”
“Secondary market rates, notably T-Bill/KIBOR rates, have risen by roughly 200bps since the previous Monetary Policy Statement (MPS) in April owing to uncertainties over the elimination of subsidies on gasoline and diesel, as well as the continuance of the International Monetary Fund (IMF) program.”
Treasury notes cut-off rates, on the other hand, fell for the first time in over a year in the most recent auction, down 5-29 basis points to 14.49 percent, 14.70 percent, and 14.75 percent for three, six, and twelve months, respectively.
Topline Research surveyed top investment managers to get their opinions on the country’s economic prospects.
According to the poll findings, around 54 percent of participants predicted a 100bps rise, 14 percent expected a 150bps increase, and 11 percent expected a 200bps or more increase.
Only 13% of participants, on the other hand, foresee a 50 basis point hike, while 9% expect no change.
Pakistan is now experiencing difficult economic circumstances, with decreasing foreign currency reserves, mounting budget deficits, and the new government’s indecisiveness on critical economic initiatives worsening economic problems.
“It will be critical for the government to adopt the necessary reform initiatives, such as removing the gasoline/diesel subsidy, limiting imports, and improving tax collection.” This would clear the path for the IMF programme to resume, which is now halted, and will result in dollar flows, which will help to relieve pressure on the currency and foreign exchange reserves in the future,” the expert said.
Inflation is expected to rise much more in the following months. In the previous two months, the rupee has lost 9.8% of its value versus the US dollar, breaking through the 200-level on Friday. The rupee has been under substantial pressure due to a lack of import cover of less than two months and delays in the IMF bailout.
The falling rupee, along with record-high fiscal slippages, is expected to push consumer price index (CPI) inflation to 15-16 percent, justifying a rate rise of at least 100 basis points.
“This is in addition to the SBP‘s 525bps policy rate hike from September 2021,” according to another analyst.
CPI inflation in April 2022 hit a two-year high of 13.37 percent, compared to the same month a year earlier, and was 1.6 percent higher than the previous month, according to data issued by the Pakistan Bureau of Statistics (PBS) two weeks ago. Inflation is expected to average 9-11 percent this fiscal year, according to the SBP.
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