KARACHI, July 30: The market response to new monetary policy was against the expectation of the State Bank of Pakistan as the inter-bank money rate fell to even half per cent, while an increase of 405 points was witnessed in the KSE 100-share index.
Despite tightening of monetary policy by increasing the discount rate by one per cent, the market reacted opposite to the action taken by the SBP.
“In the beginning Karachi Inter-Bank Offered Rate (Kibor) was set at 13.49 per cent but then the rates started falling and at closing we traded money even at half per cent,” said the treasurer of a commercial bank.
Bankers and market experts saw no significant impact of the discount rate increase on inflation as the pressure is mounting to push the inflation figure further high in the coming months.
A number of analysts and treasurers of banks said the discount rate increase was lower than the market expectation, while they were also anticipating more steps along with the monetary policy unveiled on Tuesday.
“We were expecting that with the increase in the discount rate, Statutory Liquidity Requirement (SLR) and Cash Reserve Requirement (CRR) will also be increased at least by one per cent,” said the treasurer of a bank.
Presence of ample liquidity in the banking system despite tight monetary policy was a clear sign that the SBP resorted to the ‘mild action’ for tightening of the market, said an analyst, who believes that the SBP was under pressure from the government, which in turn being pressed by the stock brokers and the manufacturing sector willing to have lower interest rates.
Analysts said the stock brokers found the new monetary policy in the right direction and they expressed their response by boosting the stock index by over 400 points.
Analysts also increased their annual inflation target after the announcement of the monetary policy.
“We have raised our inflation expectation to 18 per cent from our previous estimates of 15 per cent,” said Mohammad Imran, research head at First Capital Equities.
He said the rationale behind “our changed stance is the rising food prices and recent hike in domestic oil prices”.
He was of the view that inflation would not accept any impact of the recent discount rate hike and would continue to rise with the higher food and oil prices.
“There is no chance of a cut in oil prices domestically as diesel is still being subsidised by Rs35 per litre,” said Imran.
Opec said on Tuesday that the oil prices might fall to $80 per barrel. However, the analysts see no major change in domestic oil prices, thus it will continue to inflate the economy.
The global food prices would also continue to add fuel to the inflation unless the country gets rid of the food imports for its domestic consumption, they said.
Analysts expect that the CPI (Consumer Price Index) to be recorded at 23 per cent for July 2008-09, and the weekly SPI (Sensitive Price Index) trend support the projection. The SPI showed an average increase of 3.5-4 per cent over last month.
Furthermore, the higher inflation is likely to continue in August and September as well due to the seasonal pre- Ramazan hike in food and other essential items prices.
Even a conservative one per cent monthly increase in CPI indicates that August and September inflation would be settled around 22 per cent, they said.
