SBP likely to hold policy rate at 22% after ease in inflation. The State Bank of Pakistan’s key interest rate is projected to remain steady this month at 22% as inflation eases due to lower gasoline prices and a stronger rupee.
In order to manage growing inflation and support the country’s external balance, the SBP has raised its policy rate by a total of 1,500 basis points since October 2021. The rate, however, has been frozen since July 2023.
Topline Securities polled analysts and financial market players and found that no change in the benchmark rate was predicted at the upcoming policy review meeting on October 30.
“At least 70% of participants expect the policy rate to remain unchanged at 22%. While 16% of participants expect the policy rate to down by 25bps to 100bps and 11% of participants expect it to down by more than 100bps,” said Topline Securities, citing its poll.
“We also believe the SBP will keep the policy rate unchanged at 22% in the upcoming meeting.” Many analysts foresee the SBP is done hiking rates and will stay on hold until at least March 2024.
Since the last meeting of the SBP’s Monetary Policy Committee (MPC) on September 14, there have been significant developments. The MPC will most likely discuss these at a future meeting.
These include a sharp drop in Pakistan’s current account deficit from $164 million in August to $8 million in September, an 11% drop in local fuel prices (diesel and petrol), the stability of international oil prices at around $90 per barrel, and a 7% increase in the rupee’s value against the US dollar.
Cut-off rates in the most recent T-Bill auction fell by 30-45 basis points (bps) since inflation is expected to fall.
As SBP likely to hold policy rate at 22% after ease in inflation, currently, the cut-off yields for three, six, and twelve months are 22.2%, 22.39%, and 22.4%, respectively.
Furthermore, since September 14, secondary market yields on three-year Pakistan Investment Bonds and six-month T-Bills have fallen by 280 basis points and 239 basis points, respectively.
The stabilising efforts have begun to bear fruit. According to the SBP’s statement issued last week, inflation has fallen to 31.4% in September 2023, from 38% in May 2023, and is expected to continue its downward trajectory in the coming months, whereas the external account has improved significantly and foreign exchange buffers are being built up.
The SBP sees real interest rates turning significantly positive in the future, since inflation is likely to fall significantly in the second half of this fiscal year.
