Pakistan’s central bank is scheduled to meet on Friday (March 19) to determine the benchmark interest rate for the next two months and outline the possible trend of the rate in the near future in line with the current global practice.

Although the State Bank of Pakistan (SBP) had strongly hinted in January that the policy rate would be maintained at the current level of 7% in March for the next two months and until the economy fully recovered, a small segment expects the central bank to revise the rate slightly upwards.

Earlier in March, the federal cabinet approved amendments to the SBP Act to make it an independent institution as part of reforms under the International Monetary Fund (IMF) programme in a bid to restart the $6 billion loan facility, which had been on hold since Covid-19 surfaced in Pakistan in late February 2020.

The amended bill is yet to be approved by parliament.

The autonomy will end the central bank’s role of taking care of economic growth and empower it to take policy measures to control inflation, which remains high due to food and energy price hikes in the past several months.

The autonomy is being granted to check government’s expenditures and control fiscal deficit, formulate exchange rate policies, end political interference and stabilise prices of food, energy and other commodities, which have remained a challenge since the Covid-19 outbreak.

The surge in inflation to over 8% has turned the real interest rate (prevailing interest rate minus inflation) negative by one percentage point, which is contrary to the practice of keeping the policy rate above the rate of inflation.

“There is a minority which expects an increase in the benchmark interest rate by 25-50 basis points,” BMA Capital Executive Director Saad Hashmi said while talking to The Express Tribune.

“The central bank is expected to not surprise the market. It will most likely keep the rate unchanged at 7% for the next two months,” he said.

The market has largely developed consensus that the central bank will maintain the status quo.

Pak-Kuwait Investment Company Head of Research Samiullah Tariq said that the SBP would leave the rate unchanged to help the economy sail out safely from the challenges posed by Covid-19. “Pakistan is passing through the third wave of Covid-19,” he said.

Earlier, the SBP aggressively slashed the benchmark interest rate by 625 basis points from March to June 2020 to 7%. With this, the market strongly believes the rate has bottomed out and expectations for an increase are gradually gaining momentum, as the real interest rate either stands near zero or remains negative.

Two experts said that the central bank may signal an increase in the rate in the next monetary policy meeting to be held in May 2021.

“The SBP may indicate a rise of 25-50 basis points in May under (its newly adopted practice of) forward guidance,” Tariq said.

Sharing results of a poll conducted recently to know about market expectations ahead of Friday’s meeting, Topline Research said “of the (total) 118 participants, 82% expect no change in the policy rate on March 19, 2021 monetary policy statement (MPS).” However, 18% of the participants expect a rise in the policy rate.

Regarding the cumulative hike in 2021, 65% of respondents voted for a rise of 25-100bps. However, 24% expect the central bank to increase the rate by 125-200bps in 2021.

Surprisingly, 8.5% of the participants see no change in the policy rate during 2021.

“We are expecting no change in the policy rate in the March 2021 MPS while we expect an increase of 100bps in 2021,” the research house said.

“We believe policy rate will increase in future due to likely restoration of IMF programme over next couple of weeks wherein energy tariffs are likely to be adjusted upward and rising international oil and commodity prices (sugar, scrap, palm oil etc),” it added.

Arif Habib Research also conducted a separate poll and shared similar results. Sana Tawfik at the research house said SBP might consider keeping the rate unchanged in order to boost the domestic demand despite running a negative interest rate of 2%.

Moreover, the previous monetary policy statement in January also hinted at a gradual and measured monetary tightening stance when the need arises.

It also highlighted that the near term inflationary expectations remain moderate.

“If we look at the numbers, average inflation for 8MFY21 settled at8.2%, within the range provided by the SBP (7-9% for FY21). Therefore, it seems likely that the central bank would let the real interest rates remain negative in the medium term,” she said.

Published in The Express Tribune, March 19th, 2021.

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