State Bank expected to keep policy rate on hold

KARACHI: The central bank is expected to keep its key interest rate steady at a policy review due on Saturday, a possible status quo for the fourth consecutive meeting amid signs of modest inflation and slower private sector credit growth, analysts said on Thursday.

A number of analysts, contacted by The News, expected that monetary policy could ‘hardly’ be changed due to weak economic data. They said the core inflation is inching up and twin deficits are widening, while there is an uncertainty over the outlook of the balance of payments.

Pakistan’s current account deficit widened to 2.2 percent of gross domestic product in first half of the current 2016/17 fiscal year from 1.3 percent in the same period last year. Sakib Sherani, ex-economic advisor to the government, said that his interest rate expectation was in line with the market consensus.

“I don’t foresee any change in the SBP’s (State Bank of Pakistan) stance in January monetary policy announcement,” Sherani said. The SBP Monetary Policy Committee (MPC), at its last monetary policy meeting in November, kept the benchmark interest rate unchanged at 5.75 percent due to inflation risks. It anticipated a modest rise in inflation for the next six months.          

Economist Bilal Khan at Standard Chartered Bank also forecasted the central bank to stay on hold at its first bi-monthly policy meeting of 2017. “The minutes of the last meeting showed a cautiously dovish MPC: the decision to hold versus a 25 basis points cut was supported 6-4 against 8-2 in September,” Khan said. “Despite the higher easing risk, we maintain our status quo call for the following reasons.

First, the MPC minutes are backward-looking. Since the November meeting, the Organisation of the Petroleum Exporting Countries agreed to cut output, which contributed to 18 percent rise in oil prices.” Another analyst said despite a slight rise in non-food and non-energy inflation in December the MPC would keep the policy rate unchanged.

“Even though the consumer price index (CPI) inflation remained relatively lacklustre/range-bound since October 2016, more pertinent number to consider would be core inflation measured by non-food non-energy that inched up to its over-a-year high of 5.3 percent in November compared with 5.2 percent in December,” said Shiraz Zaidi, an analyst at Arif Habib Limited.

“Recent hike in petroleum products’ prices by the government would further support the upcoming months’ inflation (in tandem with other commodities in global markets), making the case stronger for a flat interest rates at least in January, but hike in March.”     

Zaidi estimated CPI inflation at around 4.7 to 4.9 percent in the first quarter of 2017 and 5.2 percent plus by the end of first half. The CPI inflation fell to 3.7 percent in December from 3.8 percent in November.

Economists see no need for fresh monetary stimulus by the central bank to spur growth. The government has already announced a Rs180 billion worth of exports incentive package for the struggling exporters.

SBP’s last MPC minutes also suggested that it expects the government’s 5.7 percent growth target for 2016/17 to be met.

Another analyst said the increased yields on long-term government papers, while fall in short-term securities at the recent auctions have also led to an interesting scenario on where interest rates are heading.

“Even though, market treasury bills in the secondary markets traded at lower yields at the last auction, we still anticipate status quo in January,” said Eman Khan an analyst at Tresmark Research.

“The MPC needs to be convinced more about large-scale manufacturing growth before it can go for a further slash in policy rate.”     

Published in The News, January 27th, 2017