The State Bank of Pakistan (SBP) yesterday kept the policy rate unchanged at 13.25%, which is inline with our expectations and market consensus. This is the first pause in the rate hike cycle, after consecutive rate increases in the previous 8 monetary policies. The SBP is encouraged by most macroeconomic indicators (particularly inflation) remaining within the expected range, while flagging that the markets have adapted well to the new "market-determined" exchange rate regime (taken as a sign of confidence). Favorable trends underpinning the stance include:
- CPI readings (averaging 11% in 2MFY20) are expected to remain within the 11-12% range across FY20, unchanged from earlier estimates.
- CA deficit of US$579mn in Jul'19 demonstrated the efficacy of the macroeconomic adjustments thus far. The central bank points out that non-oil CAD has been eradicated.
- Within the external account, exports have shown encouraging growth - mostly in terms of volumes - even if growth in value term is modest.
- Even though LSM is contracting, the export oriented sectors, including value-added textiles, are growing. As a result, SBP maintains its forecast for GDP growth in FY20 of 3.5%.
- Despite a very high fiscal deficit in FY19 (8.9% of GDP), the SBP remarks that tax revenues have grown considerably during Jul-Aug'19 period.
Recall that the previous MPS (in Jul'19) remarked that given the macroeconomic outlook at the time, interest rate and exchange rate adjustment have been nearly completed. That said, as per our recent interactions with the central bank, we believe the SBP will likely continue to adopt a cautious stance, and wait to be adequately convinced of further improvement (particularly on the fiscal side) before embarking on monetary easing.
The recent supply disruption in oil prices and high food inflation are key risks; the former is not yet factored by the central bank, in our view. Even if the crisis is resolved within the next few weeks and oil prices revert to their "normal" range of US$60-70/bbl, we think monetary easing before January 2020 is unlikely (with risks tilted towards a delay into 2QCY20). In this regard, it is still premature to be comfortable about the external account given an uncertain geopolitical environment. At the same time, addressing fiscal issues remain an uphill task, which may necessitate caution on the monetary policy front.