SBP likely to raise key policy rate by another 150bps: analysts

KARACHI: The State Bank of Pakistan (SBP) is scheduled to announce the monetary policy on December 14, 2021, in which the central bank may further increase the policy rate by 100 basis points to 150 basis points, analysts said on Thursday.

In the last policy announcement on November 19, 2021, the central bank surprisingly increased the key policy rate by 150 basis points to 8.75 per cent.

The analysts at Topline Securities said the latest developments related to yield in treasury bills, International Monetary Fund (IMF) conditions and inflation forecast may compel the State Bank to further increase the policy rate.

“We expect the SBP to increase [the] policy rate by 100-150 basis points in [the] upcoming monetary policy on December 14, 2021,” the analysts said.

“We also expect the SBP to revise upwards its inflation and current account estimates,” they added.

The analysts said after the last monetary policy statement on November 19, 2021, the cutoff yields on Pakistan Investment Bonds (PIBs) and the Market Treasury Bills (MTBs) increased 200 to 300 basis points. Moreover, in the T-bills auction on December 1, 2021, the government raised over Rs500 billion at a much higher rate than their previous auction where the government accepted much lower bids.

“This [monetary policy announcement] will [be] a key event before [the] upcoming crucial T-Bills auction scheduled on December 15, 2021 and the PIB auction scheduled on December 22, 2021, as it will give direction to the market on interest rates outlook,” the analysts said.

The analysts said interestingly Adviser to the Prime Minister on Finance and Revenue Shaukat Tarin recently said in an interview that the banks misused the auction window to bid at higher rates.

He also said the government also had other options to use if banks do not mend their ways.

In the next scheduled T-Bills auction on December 15, 2021, a huge maturity of T-Bills of Rs1.5 trillion is due where the government is targeting to raise Rs1.4 trillion from the auction.

Similarly, from the PIBs auction, the government plans to raise Rs100 billion against the maturity of Rs37 billion. Another auction of the T-Bills is due before the year-end (December 29, 2021), where there is a maturity of Rs1.1 trillion and the government is anticipated to raise Rs1.2 trillion.

This upcoming policy announcement will be the first after Pakistan reached the staff-level agreement with the IMF for the sixth review on November 22, 2021.

Pakistan has to meet certain conditions before the IMF Board gives final approval for the disbursement of $1 billion.

Hence, many believe that an increase in the policy rate in the upcoming monetary policy announcement cannot be ruled out.

The Topline Research also conducted a poll of key financial market participants on the expectations of the upcoming monetary policy statement.

A total of 75 participants took part in the latest poll, compared with 73 participants in the poll conducted for November 2021 policy statement.

Around 52 per cent of the participants are expecting 100 basis points increase in the policy rate in the upcoming policy statement, whereas 16 per cent expects more than 100 basis points rise.

Similarly, 16 per cent of them anticipate an increase of 75 basis points and 10 per cent of the participants expects 50 basis points increase. Only 6 per cent of the participants expect no change in the policy rate.

The majority of the participants, around 63 per cent, expects more than 100 basis points increase in the policy rate by the end of FY22, while 22 per cent of the participants are expecting an increase of 100 basis points. Around 10 per cent of the participants are expecting a rise of 50 basis points during the period.

The survey suggests that 43 per cent of the participants expect the rupee/dollar parity in between 180 to 185 by the end of the current fiscal year.

Meanwhile, 33 per cent of the participants expect it to be in the range of 175 to 180. Around 16 per cent of the participants expect the rupee/dollar to be in the range of 185 to 190.