Third consecutive rate hike, but guidance for gradual moves ahead
The State Bank of Pakistan (SBP) has raised the policy rate by 100bps to 9.75% – taking cumulative rate hikes since September 2021 to 275bps. The decision was in line with consensus market expectations. In addition, the central bank has guided that it is likely to keep the policy rate “broadly unchanged in the near term.” – we interpret this to imply status quo in the January 2022 MPC meeting – unless future inflation and CAD data suggest otherwise. The SBP also termed the increase in secondary market yields (jumping more than 200bps since previous MPS) to be “unwarranted,” as it looks to firmly establish the credibility of its forward guidance.
The SBP has revised its inflation outlook for FY22 to 9-11% (from 7-9% at the start of FY22) in light of the recent inflation outturns (11.5% in November vs. 8.7% on average in the prior 4mths). It also expects inflation to start coming off in the second half of 2022, potentially into the single digits as global commodity prices moderate from recent highs. We, however, flag that there is a risk of CPI averaging slightly above 11% during CY22. Some factors that can keep local prices high include: (i) increase in petroleum levy that will counter the effect of lower international oil prices on petrol prices, (ii) another increase in base power tariff is possible, and (iii) imminent removal of tax exemptions ahead of the IMF program resumption.
The SBP expects C/A deficit for FY22 to clock in at 4% of GDP (we expect the same), which is higher than the earlier expectation of about 3% of GDP. It also expects that Pakistan will have enough capital inflows for the remainder of FY22 to cover the above estimated CAD (including rolled-over bilateral assistance and commercial bank loans). The SBP asserts that about 70% of the expansion in imports and thus CAD has been led by higher commodity prices (majorly oil).
Growth outlook remains intact – with FY22 GDP growth expected between 4-5% – especially, as it is driven mostly by the robust performance of Agriculture (not affected by monetary policy). High frequency indicators, such as sales of cement, autos, and petroleum, have so far shown only a mild slowdown in activity. Uncertainty around the Omicron variant did not feature much in the MPC discussions, due to lack of adequate data on its severity.
The SBP has strived to calm market expectations by indicating the possibility of no change to the policy rate in January, in our view, especially as money market rates have strayed well ahead to c.11.5% (6mth T-Bill yield). We believe the latter is a key reason why the KSE-100 has shed c.4% so far in December. Going by the SBP’s guidance, we would expect Pakistan equities to rebound in the near term, led by sectors such as Cements and Autos.