Pakistan’s central bank is scheduled to meet on Monday to announce monetary policy for the next six weeks with a majority of experts anticipating no change in policy rate for now as the IMF has recommended to maintain a tight policy to overcome future economic challenges.

At the same time, a notable section of analysts do not rule out a token rate cut by 50 basis points (bps), believing the central bank will surprise the financial and capital markets. No one expects a rate hike despite the IMF’s recommendation for a further increase if inflation remains stubborn. Though the lender believes the economy has stabilised, it foresees challenges re-emerging in the near future.

Financial markets expect an elevated inflation reading in the range of 27.5% to 28% for January 2024 due to high energy and food prices.

Following the monetary policy statement, the government is likely to make a second hike in gas prices by mid-February 2024. Similarly, the petroleum product prices are expected to be revised upwards for the first half of February, suggesting that inflation will remain elevated. The last hike in gas prices was made in November 2023. In December 2023, inflation surged to a three-month high at 29.7%.

The policy rate is used by central banks around the world to control inflation to achieve sustainable economic growth. The State Bank of Pakistan (SBP) has presented four monetary policies in the past six months (Jul-Dec) where it maintained the rate at the record high of 22%. Earlier, the bank jacked up the rate by 15 percentage points over 27 months to counter high inflation. However, it made bank financing significantly expensive that slowed down business and economic activities.

The latest fluctuation in the Karachi Inter-bank Offered Rate (Kibor) – at which banks offer financing to each other – and the yields on three to 12-month T-bills and one-year Sukuk have resulted in a divided opinion among analysts about the policy rate.

Read SBP keeps policy rate unchanged at 22% against expectations

In a poll conducted by treasury firm Tresmark, 83% of participants do not expect any change in rate in the upcoming monetary policy statement. In fact, the majority think there will not be any rate cut for another two months due to high inflation. “While the SBP has projected inflation to come down drastically, revision in energy prices and fuel prices will keep inflation at elevated levels,” the firm said in a commentary.

Topline Securities CEO Mohammed Sohail said “our brokerage firm expects no change (on Monday). But we think policy rate can come down (by seven percentage points) to 15% by year-end.”

Research analyst Sunny Kumar added that the brokerage house expected the status quo despite a surprise fall in T-bill yields by 50-62 bps in the outgoing week.

“According to the Financial Times, IMF’s First Deputy Managing Director Gita Gopinath has warned central banks to proceed cautiously in cutting interest rates this year and has advised against fueling market hopes for rapid interest rate cuts,” he said.

Akseer Research Director Muhammad Awais Ashraf also anticipated that the SBP would leave the policy rate unchanged, believing “the bank would adopt a wait-and-see strategy in the new monetary policy statement.”

He said the bank would maintain the rate amid foreign debt repayment pressure and a maritime trade crisis in the Red Sea.

The Red Sea crisis has the potential to inflate the cost of imports as freight charges shoot up. The situation may also lead to an increase in oil prices in the global market, making imports expensive.

Pak-Kuwait Investment Company Head of Research Samiullah Tariq, however, projected that the central bank would cut the policy rate by 50 bps, considering that the real interest rate (policy rate minus inflation) stood positive on a 12-month forward-looking basis. The real interest rate on a one-year forward-looking basis stands positive by three to four percentage points. Optimus Capital Management Research Analyst Maaz Azam also saw a possible rate cut on Monday.

Published in The Express Tribune, January 28th, 2024.

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