SBP may leave rate unchanged on inflationary pressure

The central bank is widely expected to keep the interest rate unchanged in the upcoming monetary policy after delivering 625 basis points in rate cut in a short span as inflation has crossed its lower range of 7 percent, analysts said.

More than 70 percent of respondents in a survey expected the rate to remain unchanged, according to Topline Research. Alone 20 percent voted for a rate cut, found the survey of 87 market participants.

The State Bank of Pakistan (SBP) is scheduled to announce monetary policy on coming Monday to set interest rates for the next two months.

"We anticipate the central bank to maintain a status quo and keep interest rates unchanged at 7 percent," Topline Research said in a report. "Our stance is based on the initial phase of economic recovery incentivising low interest rates, controlled external accounts, and benign nearterm inflation outlook."

The SBP reduced interest rates by 625 basis points to 7 percent between March and June to support economic growth in response to COVID-19 challenges. The announcement was deferred till September.

"I believe SBP will take a back seat for now," said Atif Zafar, analyst at Topline Securities. Annual consumer inflation accelerated faster than expected to 9.26 percent in July as economic activity gradually resumed with the easing of coronavirus lockdowns.

Consumer inflation is expected to grow at 8 percent for the current fiscal year with the number in the SBP's range of 7 to 9 percent. "Given the current negative real interest rate, and higher than projected inflation, we expect the SBP to adopt the wait and watch approach," said Muzzammil Aslam, the CEO of Tangent Capital Advisors.

"SBP will keep its focus on growth and will work on reviving the economy to its potential."

Saad Hashemy, executive director at BMA Capital said some are expecting a cut of up to 50 basis points.

They are expecting downward inflation in the coming few months, stable rupee and likelihood of international oil prices to remain stable at the current low levels for the foreseeable future.

KASB Research expected monetary tightening to begin from March next year onwards once Pakistan's economy stabilises and economic activity normalises to pre

COVID levels.

"Inflationary pressures are expected to pick pace from March and Pakistan," the brokerage said. "We believe interest rates will peak around 8.5 percent by the end of FY2020."

The economy has started exhibiting early signs of recovery with key indicators suggesting a potential turnaround in the levels of activity.

Nonetheless, the economy is still below the preCOVID levels as suggested by the recent falling trend in large scale manufacturing.

The economy recorded a current account surplus of $138 million between April and July, alleviating external pressures emanating from projected debt servicing. Moreover, Pakistan has secured $1.4 billion from the International Monetary Fund, $500 million from the World Bank, $500 million from the Asian Infrastructure Investment Bank, and $1.7 billion from the Asian Development Bank, suggesting near-term external account issues to have largely been addressed.

"We believe this scenario provides the SBP ample cushion to keep interest rates at present levels without the risk of inducing unsustainable growth," said Zafar.