KARACHI

The Pak Banker - - COMPANIES/BOSS -

Busi­ness­men and in­dus­tri­al­ists have built high hopes for the cut in dis­count rates from 50 ba­sis points to 100 ba­sis points in the up­com­ing mon­e­tary pol­icy state­ment which posed pres­sure on the cen­tral bank.

The ma­jor in­di­ca­tors in­clud­ing head­line in­fla­tion level and con­sol­i­da­tion of ex­ter­nal ac­count made a fa­vor­able room for the cen­tral bank to cut the dis­count rate sig­nif­i­cantly though bank­ing in­dus­try may bear the burn of its im­pact as ma­jor earn­ing drives from in­ter­est in­come may drag down their prof­itabil­ity.

An­a­lysts said that the prob­a­bil­ity is high that SBP will follow a grad­ual pol­icy of re­duc­ing bench­mark in­ter­est rate be­cause it is dif­fi­cult to fore­cast the global price of oil after a sud­den fall. Im­proved ex­ter­nal sec­tor out­look could be another key trig­ger for a likely rate cut as its sce­nario has also been very sta­ble lately as to­tal for­eign ex­change re­serves of the coun­try cur­rently stand at $15.2 bil­lion, whereas the re­serves held by SBP are over $ 10.3 bil­lion (equiv­a­lent to 3 months im­port cover).

As a re­sult, ru­pee has been pretty sta­ble re­cently. In 2014, it has ap­pre­ci­ated by 5% against US dol­lar due to in­creas­ing for­eign in­flows. Money mar­ket is an­tic­i­pat­ing a 100bps cut in up­com­ing MPS as yields on gov­ern­ment se­cu­ri­ties have de­clined sig­nif­i­cantly by 124-280bps in fourth quar­ter of 2014. Cur­rently, 2-year PIB is trad­ing at 9.0% which is down by 280bps, whereas yields on 6mo T-bills have de­clined by 124bps to 8.7% in 4Q2014.

Real in­ter­est rates have also in­creased sig­nif­i­cantly due to widen­ing gap be­tween in­ter­est rates and in­fla­tion. In De­cem­ber 2014, real in­ter­est surged to 5.2% while first half of FY15 real in­ter­est rate av­er­aged at of 3.7%. Since this rate is sig­nif­i­cantly higher than the his­tor­i­cal av­er­age of 2 per­cent, down­ward adjustment in in­ter­est rate makes sense. In terms of macroe­co­nomic re­cov­ery and the agreed tar­gets with In­ter­na­tional Mon­e­tary Fund (IMF), Gov­ern­ment is largely on track. How­ever, lower rev­enues on oil prod­ucts and in­creased spend­ing on law & or­der sit­u­a­tion could lead to higher fis­cal deficit. Gov­ern­ment had set a fis­cal deficit tar­get of 4.9% for FY15 which is likely to be missed due to above men­tioned rea­sons. An ex­pected slip­page on fis­cal deficit tar­get could also be one rea­son why SBP would opt for a cau­tious ap­proach. Hence, it is ex­pected that SBP will slash the pol­icy rate by 50bps in up­com­ing MPS and go for a fur­ther cut of 50bps later on.

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