State bank may increase 100bps in discount rate to 8.50pc

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KARACHI: The central bank may increase 100 basis points to 8.50 per cent in its discount rates in the monetary policy meeting to be announced on Saturday for the next two months, market analysts belonging to different brokerage houses said here on Thursday. This would be the first monetary policy meeting of newly elected Prime Minister Imran Khan.

Topline Brokerage House Chief Executive Mohammad Sohail said, “SBP may increase 100 bps as the external account pressure continues despite measures taken by the government.” This is going to be the third consecutive rate increase.

An analyst at Arif Habib Securities, Arsalan Habib anticipates that the Monetary Policy Committee of the State Bank of Pakistan (SBP) may raise its policy rate by 100 bps to 8.50 per cent. He said it seems like the money market has already incorporated the rate hike, which indicates that the SBP must enhance policy rates to fulfill the gap of 60 bps between the 12-Month T-Bills and Discount Rate.

In the last meeting, SBP increased the policy rate by 100 bps as 5 out of 6 members gave the nod after considering various factors including trends and outlook of core and non-core inflation, supply and demand gap, and pressure on external account position.

An analyst at Taurus Securities Ltd, a subsidiary of National Bank of Pakistan (NBP) said that conservative estimates peg the expected policy rate hike at 75 bps. The State Bankʼs MPS, set to be issued on Saturday, will be a key factor going forward as the IMF arrives in October, he added.

If this holds true, he said, we will have missed an opportunity to speed up negotiations with the IMF with proof of our commitment to an inevitable period of austerity. A policy rate hike of 100-150 bps would be in line with the SBPʼs past decisions and future expectations of the direction of our economy, he claimed.

While a policy rate hike, of any magnitude, will temper some of the inflationary pressure of the rising costs of energy and gas going forward, a confluence of negative stimulus may make October our toughest month of the calendar, the analyst said.

The consumer price Index (CPI) for September 2018 expected to be ranged at 5.18 per cent YoY. Motor Fuel has experienced an appreciation of 24.01 per cent YoY as the Brent rose 65 per cent YoY in Rs terms. MoM both Food and Fuel costs are down (0.14% & 1.4% respectively.)

The analyst said Pakistan’s current account deficit (CAD) stood at $18.5 billion during last fourteen month. SBP’s forex reserves are declining rapidly and stood at $9.3 billion from its peak of $16 billion in 2016. SBP is trying to maintain a high Policy Rate in an attempt to manage CAD, support government plan to mobilize both external and internal flows and anchor healthy sentiments in Country’s FX and money markets, the analyst added.

A Topline Security report has recently raised the interest rate forecast and expected a hike of further 200 basis points in the 2nd half 2018, which will take the State Bank’s policy rate to 8.5 per cent by December 2018.

The analyst claimed that September 2018 headline inflation to settle at 5.15 per cent YoY compared to 3.86 per cent YoY in September 2017 and 5.84 per cent YoY in August 2018. The expected decline in CPI is due to slumping in prices of vegetables like onions, potatoes, fresh fruits and fresh vegetables while further support emanated from a decline in prices of Motor Gasoline and High-Speed Diesel.