Market expects 100-150bps hike in interest rate

Published July 6, 2022
The central bank has announced that its Monetary Policy Committee (MPC) meeting will be held on Thursday. —Dawn/File
The central bank has announced that its Monetary Policy Committee (MPC) meeting will be held on Thursday. —Dawn/File

KARACHI: The financial market expects a 100 to 150 basis point increase in the interest rate, which could be announced by the State Bank of Pakistan (SBP) in the next scheduled monetary policy.

The central bank announced on Tuesday that its Monetary Policy Committee (MPC) meeting will be held on Thursday and Acting Governor SBP Dr Murtaza Syed will unveil the policy statement for the next two months at a press conference.

Analysts and researchers believe interest rates will go higher mainly due to the rising trend of inflation, which noted a sharp rise of over 21pc in June.

“I believe the interest rate may be increased in the range of 100 to 150 basis points in the next monetary policy since inflation looks around 18 to 19pc for the new fiscal year (FY23),” said Samiullah Tariq, Head of Research at Pak Kuwait Development and Investment Company.

Currently, the policy interest rate is at 13.75pc, while the inflation for FY22 was 12.2pc; the real interest rate was still positive. However, if inflation remains in the 18 to 19pc range, the interest rate could be lower than the inflation rate, implying a negative real interest rate.

Financing experts believe that higher interest rates of 18 to 19pc (following expected inflation of up to 19pc in FY23) would severely harm economic growth. The higher interest means a higher risk of default, which compels banks to either minimise financing or ask for a further higher interest rate to cover the risk.

Finance Minister Miftah Ismail has already said the new fiscal year will face much higher inflation due to higher oil prices and a super cycle of commodity prices.

As per the Topline Securities survey, 80pc of the participants expect an increase in the policy rate in the upcoming monetary policy. Around 45pc of the participants expect the policy rate to increase by 100bps; 30pc anticipate an increase of 150bps, and 5pc expect an increase of more than 150bps.

In terms of inflation expectations, 52pc of participants anticipate inflation of more than 17pc in FY23.11pc of those polled expect it to be between 16 and 17pc, while the rest expect it to be less than 17pc.

“The results are also in line with our estimates as we also expect a further hike in policy rates going ahead as the SBP is likely to increase rates owing to inflation and external account concerns,” said the research report, adding that the SBP has already raised the policy rates thus far by 400bps in 2022.

CPI inflation in June 2022 exceeded 21pc year on year (plus 6pc month-on-month), exceeding market expectations of 18pc to 20pc.

This was due to higher than expected inflation recorded by the transport and food segments of CPI, which clocked in at 62pc year-on-year (YoY) and 26pc YoY, respectively.

Published in Dawn, July 6th, 2022

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