Monetary Policy Expectation: 25-50 bps increase likely

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  • Market expecting 50 bps to 100 bps increase in the Monetary Policy
  • Higher Inflation in future and Unstable External Account are driving forces for an increase in the Interest Rates
  • Hawkish Monetary Policy to continue as Pressure exists for meeting IMF Requirements

State Bank of Pakistan is scheduled to announce its Monetary Policy for next two months today on Friday, 29th of March 2019.

Majority of Research Houses believes that Discount Rate is expected to be increased by 50 bps as SBP will go for steady increase in Interest Rates till the end of 2019.

The average CPI Inflation stands at 6.4% well below the target of 8%. Inflation is expected to average around 7.5% for FY19, hence positive Real Interest Rate of 2.75% already prevails. Moreover, Current Account deficit has also begin to decline which is a positive omen. Thus many analysts believe that there exists not much need of increasing the Discount rate at the moment. Though SBP is expected to show a token increase of 25 basis points primarily to show IMF that Hawkish Monetary Policy is being pursued.

Rise in Inflation

International Monetary Fund (IMF) has insisted on an increase in the rate as a requirement for availing bailout. IMF expects Inflation to increase to 14% in the coming months.

Governor SBP Tariq Bajwa has mentioned many times that the lagged impact of currency devaluation has yet to take place which is expected to drive the inflation upwards. CPI Inflation for the month of March is expected to touch 9% owing to Rising food prices and higher fuel cost.

Crude Oil is expected to average around $75/ barrel in 2019 as Inventories from last year liquidate and demand picks up. Sanctions on Iran and Venezuela are expected to keep the supply limited while OPEC+ price setting arrangement is expected to increase crude oil prices from Q2 2019. This is expected to keep petroleum prices up in Pakistan while Petrol Price may touch Rs. 100/litre soon.

Adnan Syed, a senior analyst and Resident Editor of The Mint PK, Comments: “Rising inflation is a real cause of concern at the moment. Average Inflation from now till December is expected to remain around 9% on back of rising Fuel prices, food and core inflation. The real interest rates have declined to 1%, lowest in 1.5 years. Thus SBP is expected to make upward adjustment to the tune of 25- 50 bps”

Market Yields adjust for an Increase

T-Bill yields in secondary market trading has increased by 50 bps, incorporating an expected increase in Interest Rates.

6-Months T-Bill trade at 10.99% depicting an increase of 45 bps as compared to 10.55% in last month. 6-Months KIBOR has also inceased to 11.08% as compared to 10.75% at 2018 end.

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