The State Bank of Pakistan (SBP) is likely to maintain its policy rates at 5.75 percent on Saturday owing to the rising Consumer Price Index (CPI) which was hovering at 4.2 percent in February 2017, but the analysts believed that it would be clocked in at 4.86 percent in March this year.
“SBP to keep its policy rate unchanged at 5.75 percent in the Monetary Policy Statement (MPS) for the next two months,” said an analyst at AKD Securities. Moreover, mounting pressures on the external front as the current account deficit is up 120 percent year-on-year, while the declining forex reserves will also eliminate any justification for a further relaxation, he added.
Inflation levels are now expected to see a considerable rise, as the impact of the seasonal uptick in food and higher fuel prices translates into a higher CPI index. In March 2017, the analyst projects CPI to clock in at 4.86 percent YoY higher (vs. 4.2 percent YoY in February 2017) reflecting 0.76 percent sequential increase on MoM.
Over the last eight months, the average CPI inflation remained at 3.9 per cent YoY, though still at low levels, stands higher than the 2.5 percent YoY during the comparative period of 2016, the preceding year. While a higher inflation remains unfavourable for monetary easing, it will be a key factor demanding a status quo. Additionally, mounting pressures on the external front is another key risk factor, particularly with a noted decline in forex reserves (import cover at 6.05 million vs. 6.87 million at June 2016) before the upcoming foreign debt repayments in fourth quarter 2016-17 (Paris Club, Eurobond). Bond yields have also reflected the same, whereas auction yields have been maintained in the last two months’ auctions.
On the other hand, Large Scale Manufacturing (LSM) growth in the nine months of 2016-17 remains tepid at 3.48 per cent YoY vs the 4.5 per cent YoY in the same period last year. The credit growth, though up by 13.6 per cent YoY as of February 2017, still remains lower than its historical high of 17.2 per cent YoY 2007-08 average.
The SBP is all set to announce its MPS on March 25, 2017, and it will be effective from March 27, 2017, wherein we foresee the Monetary Policy Committee of SBP maintaining the Policy Rate to be unchanged at 5.75 per cent, another analyst said.
During 2017, the Pak rupee has remained stable in the interbank market for the last six months at Rs 104.70-80, while in the open currency market, the dollar had touched Rs 108.30, but reversed to Rs 106.10 in the month of March 2017.
