KARACHI: State Bank of Pakistan (SBP) in its latest Monetary Policy Statement (MPS) has maintained the policy rate at 9.75 per cent which was in line with our expectations and in line with the forward guidance given in the last MPS.
Rationale for the decision: As per SBP, it had taken several key measures to achieve a more sustainable economic growth and lower inflation which includes cumulative increase in policy rate by 275 basis points in 1HFY22, increase in cash reserve requirement (CRR), regulatory tightening of consumer financing and curtailment of non-essential imports.
SBP wanted to see the impact of these measures and the developments since last monetary policy in Dec 2021 which suggests that demand moderating measures are gaining traction and have improved the outlook for inflation in the medium term. This is validated by slowdown in LSM growth and reduction in inflation momentum on MoM basis.
Inflation & GDP forecast: SBP has maintained its FY22 inflation forecast of 9-11% however FY23 inflation outlook has improved from SBP’s earlier estimates as it now expects it to be range of 5-7%. We are of the view that uptick in oil prices and expected increase in power tariff may keep the inflation trajectory at the higher end of the range given by SBP.
Forward Guidance: In its last monetary policy statement, SBP gave forward guidance as “the MPC felt that the end goal of mildly positive real interest rates on a forward-looking basis was now close to being achieved. Looking ahead, the Monetary Policy Committee (MPC) expects monetary policy settings to remain broadly unchanged in the near-term”.
In its latest monetary policy statement, MPC is of the view “the current real interest rates on a forward-looking basis are appropriate to guide inflation to the medium-term range of 5-7 percent, support growth, and maintain external stability”.
The developments from last monetary policy suggests that demand outlook is moderating which is evident from LSM numbers that slowed down in November 2021 to 0.3% YoY vs. growth of 3.6% in October 2021.
SBP governor in the analyst call stated that Inflation is expected to remain high in the near term and we may see higher number in Jan 2021 vs. Dec 2021 due to base effect however medium term inflation outlook has improved.
Monetary policy actions have also been supported by fiscal policy after the enactment of supplementary finance bill which has reduced pressure to the need of aggressive policy actions by SBP.
SBP considers real interest rate on a forward looking basis and based on the medium term inflation outlook, current real interest rate on a forward-looking basis are appropriate.
Non-oil current account deficit is 0.67% in 1HFY22 vs. 2.6% in 1HFY18. SBP expects a marginal surplus in non-oil current account deficit. Financing arrangements are already in place in the form of IMF payment, Sukkuk issue even if the current account deficit remain higher than expected.
Overall increase in current account deficit has also started to slow down and we may see some improvement going forward.
Due to increased spreads between the policy rate and cut-off yields SBP had conducted a 63-day OMO injection as this option will always remain available to SBP to dictate the secondary markets.
In the secondary market, after SBP statement, yields on T-bill and PIBs came down sharply by 25-30bps amid hope that further increase in rates may not happen in near term.