Pakistan’s central bank is strongly expected to maintain the benchmark interest rate at 7% for the seventh time in a row in a 15-month period through its next bi-monthly monetary policy statement (MPS) to be announced on Monday.

The State Bank of Pakistan (SBP) is highly likely to maintain the interest rate despite the fact that inflation has remained elevated and real interest rate stands at a negative 1-1.25% at present. Accordingly, the status quo will continue to support economic recovery in line with the government’s pro-growth policies.

However, a small number of experts believe that the central bank might surprise the market by hiking the rate by 25 basis points considering vulnerabilities in current account balance, uptrend in weekly sensitive price index and resumption of the International Monetary Fund’s (IMF) loan programme.

If the interest rate is kept unchanged, these analysts believe that the SBP would hint at making a token increase of 25-50 basis points in the monetary policy in November 2021 or in January 2022 under its newly adopted global practice of deliberating forward guidance.

The interest rate and flexible rupee-dollar parity are the two major tools available with central banks all over the world to control inflation reading and give a direction to economic trajectory in their respective countries.

Majority of the experts said that uptrend in inflation remains an international phenomenon and it was not specific to Pakistan alone. Price hikes are being experienced on the back of scarce supplies of food, petroleum products and other commodities at world markets and not due to uptick in demand for such commodities.

Accordingly, increase in Pakistan’s interest rate will be meaningless as far as inflation is concerned and it will only hurt the economy which is on a growth momentum as reflected from rising volumetric import of raw material for industrial and agricultural outputs.

Topline Securities conducted a survey of key financial market participants on expectations over the monetary policy statement (MPS) to be announced on Monday.

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“About 65% of the total 68 participants are expecting no change in the policy rate in the upcoming MPS, compared to 89% in the previous poll,” said Topline Securities Research Director Syed Atif Zafar in a commentary. “Nearly 25% of the participants expect an increase of 25 basis points (bps) while 10% of the candidates anticipate a hike of 50bps or more.”

He detailed that none of the participants expected a cut in the rate.

However, “we (Topline) expect a 25bps increase in the policy rate given the recent vulnerabilities in the current account, higher-than-expected SPI readings suggesting no decline in CPI inflation and start of discussions with the IMF on resumption of the program,” he said.

Pak-Kuwait Investment Company (PKIC) Head of Research Samiullah Tariq anticipated a status-quo.

“The Covid-19 situation has continued to weigh on the economy,” he said. “Secondly, the uptrend inflation seems transitory at global level therefore the central bank would maintain the rate to support economic growth.”

He said that inflation had shot to a 10-year high level in some developed economies including US and the UK but still they maintained their respective interest rate at the lower side to support economic activities.

Inflation is standing on a higher side at present but it is expected to reduce later on. “The annual inflation reading would remain near and around the upper limit of SBP’s projected inflation rate of 7-9% in FY22,” he said

Alpha Beta Core CEO Khurram Schehzad predicted status quo in the interest rate. He argued that a token increase in interest rate would fail to control the imported inflation.

“The uptick in the rate would be beneficial only for the banking sector and it will hurt the domestic economy.”

“IMF will not demand an increase in interest rate as rupee is maintained through the demand and supply dynamics,” he added.

Arif Habib Limied Head of Research Tahir Abbas said the inflation is driven by uptrend in global food and energy prices and highlighted that prices of non-food and non-energy items remained under control.

“The central bank would maintain status quo to aid acceleration in economic growth,” he said.

The SBP is expected to signal an increase in interest rate in November 2021 or in January 2022 this time, he said.

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

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