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Pakistan MPS Review - Rates on hold as current setting maintains balance

  • SBP has kept the Policy Rate unchanged at 15%

  • Commodity price softening offsets additional import needs and keeps CAD estimate intact

  • The SBP remains data dependent but may cut rates earlier than originally anticipated

Raza Jafri
Raza Jafri

Executive Director, Research

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Intermarket Securities
10 October 2022

The SBP has kept the Policy Rate at 15%, as demand moderation has fast-tracked owing to floods, which offsets negative near-term impact on inflation. While the floods have altered the economic outlook - FY23 inflation may exceed 20% and GDP growth may slip to 2% - the impact on the current account deficit is expected to be modest. The SBP will continue to focus on data dependency, as it awaits the final estimate for flood damages, but we sense that the interest rate downcycle may not be too far away. 

In general, the SBP expects the following for FY23:

-          GDP growth of 2% compared to 3-4% earlier, on the loss to the cotton crop and the lagged impact of previous tightening measures. Post-flood macroeconomic outlook will become more concrete once the flood damage assessment is completed by the government.

-          Average CPI in excess of 20%, compared to 18-20% earlier. The SBP has noted that the decline in the last CPI print is due to administrative measures on electricity prices, while core inflation has continued to inch up. That said, it appears content to keep negative real interest rates across the year. 

-          CAD of 3% of GDP, similar to the previous forecast, with the floods-induced demand of imported cotton and perishables to be buffered by the reduction in other commodities. Support also comes from the strong pace of remittances during recent months.

The SBP reiterated confidence that the external account remains adequately funded. Pakistan is expected to receive additional USD4bn from international sources for post-flood assistance. As such, the pre-flood estimate of SBPs Fx reserves nearly doubling to US$15bn by end-FY23 remains broadly intact, per our understanding.

The PKRs recent appreciation is a function of improved sentiment, administrative controls, a lower trade deficit, and strong remittances flow. The SBP stated it has not directly intervened in the currency market in the last two weeks.

The central bank noted that it would be presumptuous to assume that fiscal discipline will weaken post the floods and the change in the finance minister. That said, we believe the SBP may choose to cut rates earlier than initially anticipated.  

The SBP and indeed the government faces a tough balancing act between growth and inflation, while sticking to reforms under the IMF programme. The unchanged interest rates are inline with street consensus, and may help sustain the ongoing rally at the KSE100. We remain constructive on Pakistan equities, with the attractive valuations compensating for the elevated top-down risks.