SBP is expected to maintain the status quo on interest rates today

A logo of the State Bank of Pakistan (SBP) is pictured on a reception desk at the headquarters in Karachi, Pakistan, July 16, 2019. – Reuters/File
  • Market discussions suggest that the key rate will remain unchanged at 9.75% for next month.
  • SBP had increased its key rate by 275 cumulative basis points from September to December 2021 to 9.75%.
  • Today’s meeting of the MPC is the first after the start of the Ukraine-Russia conflict.

KARACHI: The State Bank of Pakistan (SBP) is due to meet today (March 8) to assess developments on the economic front and announce its monetary policy.

Contradictory movements in economic indicators suggest that the worst is not yet over, but the market has developed a consensus that the the key rate will remain unchanged at 9.75% for the next month.

The likely lack of rate change doesn’t mean the recent rate hike cycle is over, but most experts say there’s still room for another 50-100 basis point (bp) hike. ) later.

The interest rate and the flexible rupee-dollar parity are the two main tools that central banks around the world have at their disposal to control the reading of inflation and give direction to the economic trajectory of their respective countries.

The central bank had raised the policy rate by a cumulative 275 basis points from September to December 2021 to 9.75% to control rising inflation and reduce the growing current account deficit, while economic activities remain healthy.

Today’s meeting of the Monetary Policy Committee (MPC) is the first after the start of the conflict between Ukraine and Russia which threatens the economy.

A question arises if economic indicators and the geopolitical situation continue to deteriorate despite recent policy rate hikes and other measures, then why the central bank is likely to take a break instead of raising the rate today .

There are a few answers to the question. The first is that the central bank indicated in the forward guidance of its monetary policy statement (MPS) that it would keep the key interest rate unchanged in March.

In the latest forward guidance from the MPS published on January 24, central banks had mentioned that “current real interest rates on a forward-looking basis are appropriate to steer inflation towards the medium-term range of 5-7%, support growth and maintain external growth. stability. If future data outcomes require an adjustment to monetary policy settings, MPC expects any changes to be relatively modest.

However, some analysts believe that since the last MPS, major developments have taken place and new data is now available, which will likely be taken into account by the central bank in the next MPS.

The Russian-Ukrainian situation has completely changed the commodity landscape, with crude oil up 50%, coal up 140% and wheat up 57% since the last CPM.

In its interest rate forecast, Topline Securities said: “We believe that although commodity prices have recently risen sharply, but given SBP’s aim to support economic recovery and its latest guidance forward-looking, we do not anticipate any changes to the upcoming MPS.”

“The decision not to raise oil prices until June 2022 could also provide some protection for the inflation outlook,” he said.

However, the brokerage added that a rate hike could be expected at the next meeting scheduled for April 19.

“We expect changes in transmission guidelines given rising commodity prices and other recent developments,” he said.

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