Flash Report /
Pakistan

Pakistan central bank raises rate by 100bps, likely bringing end to tightening

    Raza Jafri
    Raza Jafri

    Executive Director, Research

    Intermarket Securities
    16 July 2019

    In line with consensus expectations, the State Bank of Pakistan (SBP) has increased the policy rate by 100bps to 13.25%. This brings interest rate increases since January 2018 to 750bps. In doing so, the SBP has taken into account the recent PKR depreciation (c6% since the May 2019 MPS), as well as an expected near-term increase in inflation. The SBP also expects aggregate demand to improve, as it projects GDP growth of 3.5% in FY 20f (vs 3.3% in FY 19 and the government’s estimate of 2.4%).  

    Headline CPI averaged 7.3% in FY 19, and the SBP expects CPI to rise to 11%-12% in FY 20f. That being said, the Bank expects inflation to reduce from H2 FY 20, with FY 21f inflation expected to be noticeably lower. Going by the mid-point of the SBP’s CPI expectation for FY 20f, real interest rates stand at 1.75%, which appear to be adequate, in our view.  

    According to the SBP, the 100-bp rate hike decision takes into account the imbalances of the past as well as the upcoming (but short-lived) spike in inflation. We believe this is a strong signal that interest rates have peaked. If there is a greater-than-expected fall in aggregate demand, and if inflation softens more than expected, the SBP will consider monetary easing. This will potentially commence from Q4 FY 20, in our view. 

    If interest rates have peaked, which is what we believe, there is a strong case to be made that the KSE-100 has also troughed. Despite the latest increase in rates, we believe the market will react positively to today’s monetary policy statement due to the improved guidance. This clarity should help shore up confidence, while commercial banks should also be encouraged to shift from T-bills into PIBs, which is a policy objective under the IMF.