Markets predict no change in monetary policy


Pakistan’s central bank is set to make a critical announcement on Tuesday as it unveils its next monetary policy statement. The domestic financial markets have undergone a notable shift in expectations, with a consensus now leaning towards maintaining the current benchmark policy rate at a record high of 22%. This marks a departure from earlier predictions, which suggested the possibility of a modest rate cut in December 2023.

The altered outlook precedes the awaited approval from the International Monetary Fund (IMF) executive board for the disbursement of the next loan tranche amounting to $700 million to Pakistan, expected in January 2024. Initial projections had anticipated the board’s nod before the release of the December 2023 monetary policy statement.

The recent change in expectations is also a response to a surge in inflation, reaching 29.2% in November. The spike was triggered by a substantial increase in gas prices, up to 139% for different consumer categories. Inflation is projected to persist at around 30% in December 2023, sustaining its heightened status. Earlier, the monthly inflation reading, measured through CPI, had reduced to 26.9% in October 2023.

Analysts, who were initially anticipating a token rate cut ranging from 25 to 100 basis points in December 2023, have now revised their forecasts. The updated expectations suggest a more significant slowdown in inflation from March 2024 onwards, rather than January 2024.

Financial experts now believe that the policy rate has peaked at 22%, and they anticipate a potential cut from March 2024 onwards. Projections indicate a seven-percentage-point reduction in the calendar year 2024, bringing the rate down to 15% by December 2024. Such a move is seen as providing crucial support to economic activities within the domestic economy.

Optimus Capital Management, Analyst, Maaz Azam remarked, “We anticipate a status quo policy rate due to persistently high inflation readings, unforeseen risks despite the positive 12-month forward RiR (Real Interest Rate) at 3%, and efforts to successfully complete the second review, with the IMF board meeting next month for SBA (Stand-by Arrangement) approval.”


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While the majority of market participants expect no change in the interest rate in the upcoming meeting, Muhammad Sohail, CEO of Topline Securities, pointed out that “1 in 3 participants think rates can come down.” He emphasised that reducing the policy rate would not be surprising, given the anticipated easing of inflation.

“Thus, any reduction in policy rate will not be a surprise. If not in this meeting, rates have to come down in the coming months. The money market is already expecting a 3% to 4% cut within the next six months,” he said.

Sana Tawfik, an economist at Arif Habib Limited, also predicted no change in the policy rate this time, holding the view that the SBP might consider adjusting the interest rate once there is a clear downward trajectory in inflation. “This trend is expected to materialise in the first quarter (Jan-Mar) of the calendar year 2024,” she said.

According to current projections, it is expected that inflation will remain slightly elevated in December 2023, primarily influenced by base effects. Moreover, in January 2024, there are anticipations of another gas tariff hike, further contributing to the inflationary pressures. “Given these factors, there is an anticipation that the State Bank of Pakistan (SBP) may exercise caution before implementing any rate adjustments,” said Tawfik.

On the external front, the first four months (Jul-Oct) of FY24 witnessed a remarkable 66% year-on-year decline in the current account deficit (CAD), amounting to $1.06 billion. This stands in stark contrast to the corresponding period in the prior year, where a deficit of $3.1 billion was recorded. The improvement in SBP reserves, rising from $4.4 billion at the end of June 2023 to $7.26 billion on November 24, 2023, contributed to a 0.5% strengthening of the Pakistani rupee against the US dollar. “This, in turn, played a role in controlling imported inflation to a certain extent, while international oil prices also maintained a downward trend since the previous monetary policy of October 2023,” she said.

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