KARACHI:
Pakistan’s central bank is set to make a critical announcement on Tuesday as it unveils its next monetary policy statement. Domestic financial markets have seen a marked shift in expectations, with a consensus now leaning towards keeping the current benchmark rate at a record 22%. This marks a departure from previous forecasts, which suggested the possibility of a modest rate cut in December 2023.
The revised outlook comes ahead of expected approval by the International Monetary Fund’s (IMF) executive board for the disbursement of the next $700 million loan tranche to Pakistan, due in January 2024. Initial forecasts were awaiting the board’s nod before from the release of the December 2023 Monetary Policy Statement.
The recent shift in expectations is also a response to rising inflation, which reached 29.2% in November. The rise was caused by the significant increase in natural gas prices, up to 139% for different categories of consumers. Inflation is forecast to remain around 30% in December 2023, maintaining its elevated status. Earlier, the gauge of monthly inflation, measured through the CPI, had eased to 26.9% in October 2023.
Analysts, who initially expected a token rate cut of 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 than in January 2024.
Financial experts now believe that the policy rate has peaked at 22% and predict a possible reduction from March 2024 onwards. Forecasts indicate a decline of seven percentage points in calendar year 2024, reducing the figure to 15% by December 2024. Such a move is seen as providing critical support to economic activities within the domestic economy.
Optimus Capital Management analyst Maaz Azam observed: “We anticipate a policy rate hike driven by persistently high inflation rates, unforeseen risks despite positive forward 12-month RiR (real interest rate) at 3% and efforts to successfully complete the second review , with the IMF board meeting next month to approve an SBA (Stand-by Arrangement)’.
Reading: Only the monetary interest rate can “fix the economy”
While the majority of market participants do not expect any change in the interest rate in the upcoming session, Muhammad Sohail, CEO of Topline Securities, pointed out that “1 in 3 participants believe that interest rates can be cut.” He stressed that a cut in the policy rate would not be a surprise given the expected easing of inflation.
“So any cut in the policy rate will not come as a surprise. If not at this meeting, rates should fall in the coming months. The money market is already expecting a 3% to 4% decline over the next six months,” he said.
Sana Tawfik, economist at Arif Habib Limited, also predicted no change in the policy rate this time around, supporting the view that the SBP may consider adjusting the rate once there is a clear downward trajectory in inflation. “This trend is expected to materialize in the first quarter (January-March) of calendar year 2024,” he said.
According to current forecasts, inflation is expected to remain slightly elevated in December 2023, driven mainly by base effects. In addition, in January 2024, there are expectations of a further increase in natural gas tariffs, further contributing to inflationary pressures. “Given these factors, there is a prediction that the State Bank of Pakistan (SBP) may be cautious before implementing any rate adjustments,” Tawfik said.
On the external front, the first four months (July-October) of FY24 saw a remarkable 66% year-on-year decline in the current account deficit (CAD) of $1.06 billion. This is in stark contrast to the same period last year, which saw a deficit of $3.1 billion. The improvement in SBP’s reserves, which rose from $4.4 billion at the end of June 2023 to $7.26 billion as of November 24, 2023, helped the Pakistani rupee strengthen by 0.5% against the US dollar. “This, in turn, has played a role in controlling imported inflation to some extent, while international oil prices have also maintained a downward trend since the previous monetary policy of October 2023,” he said.
Published in The Express Tribune, December 12u2023.
Like Businesses on Facebook, follow @TribuneBiz on Twitter to stay updated and join the conversation.
a href=”https://tribune.com.pk/story/2449716/markets-predict-no-change-in-monetary-policy”>Source link
