State Bank may increase interest rate 50-75bps in second half: Credit Suisse

KARACHI: The State Bank of Pakistan (SBP) is likely to shun its 10-month long monetary easing stance in the second half of the current fiscal year of 2016/17 and raise its key policy rate 75 basis points as the government may pass on oil and food inflation to consumers, a leading global financial service provider said on Monday.

“Fiscal constraints would make it difficult for the government to defer the pass-through for much longer,” Credit Suisse Group said in a report. 

“We expect YoY (year-on-year) CPI (consumer price inflation) to rise to 5.0-5.5 percent by June 2017 (3.6 percent currently), thereby propelling the central bank to raise policy rates by 50-75 bps (basis points) in 2H17 from 5.75 percent at present.”

In May last year, the central cut the interest rate to the current level of 5.75 percent.   

Zurich-based Credit Suisse said recent rainfall throughout the country and ensuing supply tightening are also likely to prop up food prices in the coming weeks as the entire impact of crop damage has yet to be assessed. Food basket constitutes 32 percent of CPI.  

It said sub-five percent CPI continued to keep real interest rates in a healthy positive territory, “alleviating any immediate need of a rate hike.” 

“Support from regulatory activities has also set a favourable backdrop for the CPI as gas tariffs have been lowered across various consumer categories. The second-round impact of these cuts are yet to manifest firmly,” the Credit Suisse said in the report, titled ‘Pakistan Market Strategy’.

“Second, the government has absorbed the impact of rising oil prices, and post September 2016. The oil price jump of 26 percent has translated into a retail fuel price increase of only nine percent.”

Credit Suisse didn’t see any negative impact on fiscal position in the second half. In fact, “lower interest cost due to falling rates and large maturities of higher-yielding Pakistan Investment Bonds will lend further support to fiscal balance.”

Fiscal deficit is expected to fall to fall to 4.3 percent in 2016/17 from 4.6 percent recorded in 2015/16 and eight percent in 2012/13. The tax-to-GDP ratio is also likely to reach 12.6 percent in 2016/17 as compared to 12.4 percent in the 2015/16.   

“However, we do expect some slippages in FY18 as the government’s priority shifts towards completion of key infrastructure and power projects prior to elections,” said the report. 

The government pro-growth policy brought the GDP up to 4.7 percent in the last fiscal year.  The financial service consultancy forecast the GDP growth rate in excess of five percent in 2016/17, highest level since 2007/08.  

Local and foreign investment would boost GDP growth. China has revised up the price tag of its early commitment of $46 billion for the energy and infrastructure development projects to 55 billion.  Alone cement sector announced $2.1 billion in new investments over the next three years, while the new auto policy has seen a big jump in new entrants with Renault and Kia announcing setting up of operations with local joint venture partners.  Soft interest rate also spurred the private sector credit offtake over the past few months.  

“Private sector credit offtake accelerated to 14 percent in 2016 (the highest since 2007), led by higher borrowings from the food and beverage, energy, construction industries and consumer lending (housing and auto loans),” the report said.

Credit Suisse expects the official exchange rate to depreciate by three to four percent against the US dollar in the near term.  It forecast emerging risks to external position with current account position deteriorating to $3.6 billion (1.1 percent of GDP) in first half of 2016/17 as compared to $1.9 billion last year. 

“This has been partially driven by a two percent decline in exports (to $10.5 billion) and a six percent increase in imports (to $21.3 billion),” it added. “Other contributing factors include the absence of coalition support fund receipts, while remittances have also seen a fall of two percent in 1H and could face additional risk if the current foreign exchange distortion in the open market versus the interbank market persists for longer.”

Published in The News, February 14th,2017