Monday, December 5, 2022

Pakistan: Rate hike of 100bps likely in MPS


Zubair Yaqoob
The author has diversified experience in investigative journalism. He is Chief content editor at

Analysts forecasts another rate hike of 100bps in policy rate from 10.75% to 11.75% in the upcoming monetary policy which is to be announced on May 20.

The aggressive monetary tightening is expected to continue by the central bank as it is going to be the seventh consecutive rate hike.

The monetary tightening is expected on the back of;

  1. i) rising inflationary pressure due to rise in prices of petroleum products and essential food items coupled with continuous slide of PKR leading to surge in prices of imported and local products (sold on import parity).
  2. ii) mounting Fiscal Deficit despite sharp cut in PSDP and rationalization of tariffs and duties, and

iii) narrowing real interest rate as it declined to 1.66% in May’19 compared to last four year average of 2.75%.

Analysts believe the State Bank of Pakistan is adopting a proactive stance to increase policy rate on account of higher inflation in upcoming months alongside attempting to curtail the current account deficit.

Real Interest Rate is Always on Higher Side in IMF Era

Since Oct’11, we have observed that during International Monetary Fund (IMF) period real interest rate (RIR) has always remained on the higher side at an average of 3.1% compared to an average of 2.2% in non-IMF period. This depicts that the IMF expects an increase in discount rate for sustainability despite lesser CPI during the period.

Money Market View on Monetary Policy

Furthermore, it seems like the money market has already incorporated the rate hike which is essential to fulfill the gap of 61bps between 12-M T-Bills (11.86%) and Discount Rate (11.25%).

Survey on Monetary Policy

AHL have conducted a short survey with institutional investors regarding their view on 1) interest rate in the upcoming Monetary Policy Statement (MPS) and 2) outlook on interest rates going forward.

Majority of the respondents (53%) are of the view that the interest rates are likely to see a 100 bps spike in the upcoming MPS. Only 12% of the respondents opined that the rates may see a 150 bps surge.

With regards to whether interest rates have peaked, 71% of the respondents are of the view that the rate hike era is yet to halt and will see further hikes going forward.

Survey asked the poll respondents about their 1-Yr forward view on the interest rate cycle. 48% of the respondents are of the view that interest rates will see a surge of 50-100 bps in the next one year. 29% of the respondents do not see any further rate hike following the upcoming MPS.

Inflation Outlook

Analysts expect May’19 inflation to settle at 9.59% YoY compared to 4.19% in May’18 and 8.82% in Apr’19, respectively. Analysts at AHL expect inflation to continue its upward trajectory in upcoming months amid low base effect of last year, sharp increase in prices of perishable goods (fresh vegetables and fresh fruits), lagged impact of adverse exchange rate movements and gradually increasing international oil prices which may result in higher prices of local petroleum products (MoGas and HSD). This may keep inflation in the range of 9.0-9.5% for the next four months.

Read also: KSE-100 tumbles 805 points on Rupee devaluation, MPS


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