The SBP has brought forward the date of the next MPC meeting by one week to November 16. There were market rumors of an emergency MPC meeting earlier this month, and this has now seemingly come to pass. To recall, monetary tightening commenced in September with a 25bps rate hike to bring the Policy Rate to 7.25%. Last weekend also saw a 1ppt increase in the CRR requirements of banks, effective immediately, which will drive out c PKR170bn of liquidity from the system (0.7% of M2).
We expect the SBP to raise the Policy Rate by at least 100bps to 8.25% in the coming MPC meeting. Note that this expectation is a revision from our earlier expectation of a 50bps hike in November; but the recent increase in CRR and the bringing forward of the MPS suggest greater urgency at the central bank. The expected large increase are explained by:
Headline inflation crossing 9% and expected to enter double-digits shortly (as early as January)
A very low Covid positivity rate (less than 1%) and c.60% of the adult population being fully vaccinated
The PKR losing c.9% FY22td vs. the USD and the current account deficit being sticky above US$1bn per month
Money market expectations – the 3m T-bill yield has already crossed 8.5%
With the IMF negotiations taking longer than expected to conclude, there is palpable uncertainty on the economic outlook. For equities, this has reflected in a significant reduction in trading activity – turnover has averaged around US$70mn per day so far in November, down from a CY22td average of c.US$115mn. In this regard, the SBP has indicated that the MPC has been brought forward to quickly address the uncertainty on monetary settings. It is possible that it also helps to reduce the uncertainty on the broader economic outlook, by accelerating the resumption of IMF program (in case higher interest rates are part of the prior conditions).
If the IMF program resumes quickly, it will support our case for a better end to the year for Pakistan equities. On the flipside, a large interest rate hike will weaken the investment case for many cyclical sectors – particularly Autos (where auto-financing has played a big role in the recent growth) and Cements (many producers have announced expansion plans).