SBP likely to raise key policy rate by 125bps on macroeconomic imbalances

SBP likely to raise key policy rate by 125bps on macroeconomic imbalances

Staff Reporter
December 3, 2021

SBP likely to raise key policy rate by 125bps on macroeconomic imbalances

KARACHI: The State Bank of Pakistan (SBP) may increase the policy rate by 125 basis points to bring it back to the double-digit, analysts said on Friday.

The Monetary Policy Committee (MPC) is scheduled to meet on December 14, 2021 to review the economy and decide the policy rate for the next 45 days. The State Bank of Pakistan (SBP) increased the policy rate by 150 basis points to 8.75 per cent in its last monetary policy statement on November 19, 2021.

Analysts at KASB Research said based on the SBP’s forward guidance and the macro-imbalances depicted in the recent economic data points, “we believe the SBP could potentially hike the policy rate by another 125 basis points and bring interest rates back to the double-digits”.

They said cracks are emerging within Pakistan’s macroeconomic landscape over the last few months, as concerns over external and fiscal imbalances have been brewing since the structural shift from economic stabilisation towards growth.

The central bank highlighted issues in its September 2021 monetary policy statement and opted for cooling down the ‘overheating’ economy.

“Without timely monetary and fiscal intervention, we believe Pakistan was on the fast track towards recreating another boom-bust cycle.”

Pakistan’s trade imbalances are hovering at record levels during the last few months because of rising economic activity, amid the commodity up-cycle. The latest trade figures highlight that Pakistan’s imports surged to an all-time high of $7.75 billion in November 2021. Despite record high exports, the trade balance more than doubled to $4.85 billion during the month.

“In turn, our preliminary estimates suggest that the current account deficit would comfortably cross the $2 billion-mark in November 2021.”

Pakistan’s Consumer Price Index (CPI)-based inflation surged to a 20-month high level of 11.5 per cent in November 2021 because of elevated food and commodity prices. Pakistan’s electricity tariffs were hiked and domestic oil prices reached record high levels to comply with the International Monetary Fund (IMF) programme.

Its second-round effects are expected to materialise in the coming months, during which we project the CPI to comfortably hover in the double-digits.

For FY22, the analysts estimate CPI inflation to average at 11.2 per cent, above the SBP’s projected range of 7 per cent to 9 per cent.

Global central banks, including the SBP, have revised their assessment over the transitory nature of recent inflation. Initially, the State Bank depicted comfort over negative real interest rates, as it was prioritising recovery and felt that the inflationary uptrend would be short-lived.

The central bank now believes that inflationary pressures are likely persistent and is; therefore, targeting marginally positive real rates to keep inflation expectations anchored.