State Bank of Pakistan (SBP) is likely to keep policy rate on hold in the upcoming Monetary Policy meeting scheduled to be held on 19th March 2021, for deliberation on monetary policy for next two months. In the previous policy announced in January the committee kept the policy rate unchanged at 7 percent.
Many analysts agree that policy rate will stay steady for a while and are not rushed to revise their expectations as far as the March monetary policy is concerned. Between January and March, not only has inflation increased: market rates have also moved up. March price trends indicate that an increase in Inflationary pressure in the economy, with the expected inflation to be around 9.78 percent higher than that of March 2020.
Despite this northward movement in market rates, a higher number of analysts are expecting status quo. This is perhaps due to the forward guidance given by SBP.
Surveys by CFA Society Pakistan and country’s fastest growing brokerage firm Topline Securities have concluded a no-change expectation in March. Over 90 percent of participants from the CFA Survey expect no change in March while 54 percent expect no rate hike in May. The Topline Survey however, depicts that 82 percent out of 118 participants expect no change while the rest are expecting an increase of 25-50 bps.
“It is expected that the monetary policy committee of the SBP will keep interest rates unchanged in March 21 MPS, owing to resurgence of Covid-19 and resultant lockdowns, which is expected to keep inflation rates in check,” said. But, Mr Irfan cautioned that there are multiple reasons for a rate hike in May’s monetary policy. He said 38% increase in international oil prices, since Jan-21, has weakened current account outlook, while Core inflation has started creeping up and large scale manufacturing activity is back at FY19 high. He added, that “SBP will take a wait and see approach in Mar-21, and gradually begin raising rates from May-21.
In its monetary policy outlook report, BMA predicts Policy Rate (PR) is likely to remain unchanged at 7.0% level. “The decision to hold PR should not come as a surprise given that SBP had already indicated in its forward guidance in Jan’21 to keep rates unchanged in the near term. Yet, the recent spike in key international energy and food commodities and their bearings on domestic inflation had become a major cause of anxiety for capital market, causing equity price to tumble, and long-term bond yields to soar,” the report said.
AKD securities in its Monetary policy outlook report maintained, that Monetary Policy Committee (MPC) of the SBP will ‘wait and see approach’ with “greater emphasis put on potential headwinds to economic recovery from rising COVID cases (7.1% positivity rate) vs. near term higher inflation outlook (avg. inflation for the next 3M stands at 11.1%) which we consider to be transitory where inflation is expected to drop to single digits from Jul’21 onwards. Key risks to our medium term outlook is the impact of budgetary measures on inflation. In a similar context, good indication of demand heating up is core inflation which is still expected to be below pre-covid levels (Mar’21: ~7.0% vs. 8.0% in Feb’20). Moreover, SBP in its previous briefing hinted upon external account stability defining monetary policy course in the near term. In this regard, while increasing commodity prices pose risks to gains on external front, potential inflows from IMF, Eurobond Issuance, and RDA balance such risks”
Usman Zahid head of Research at AKD securities, while explaining the inflationary pressures said, that preliminary price trends in Mar’21 suggests a pickup in inflationary pressure with inflation for the month likely clocking in at 9.78% YoY vs. 8.70%YoY in Feb’21 with low base effect partly playing a part. Mr Zahid added that relative ease-off in inflationary trends could be witnessed with inflation likely to be recorded at 1.0% MoM compared to 1.8% MoM primarily due to negative fuel price adjustment in electricity rate (NEPRA approved fuel price adjustment of Rs. 0.89/unit for Jan’21 applicable in Mar’21 vs. PkR1.53/unit in the previous month). On the flip side, food inflation is gaining steam with 2.13%MoM increase in Mar’21 compared to 0.81%MoM in Feb’21 attributable to continued surge in Chicken prices (+13.6% MoM) while Eggs and Fresh fruits have begun to ascend, +14.6%MoM and 11.2% MoM (estimated), respectively. Moreover, surging cotton prices (+12.6% MoM) and seasonal factors have begun to reflect in the clothing and footwear segment with cotton cloth prices +6.4%MoM. He added that overall 9MFY21 inflation is expected to be recorded at 8.4% compared to 11.5% in the same period last year.
But, experts also believe that any changes in views towards increase in Policy Rate going forward is owing to likely restoration of IMF program over next couple of weeks wherein energy tariffs are likely to be adjusted upwards and rising international oil and commodity prices including sugar, scrap, palm oil etc.
But, any hike in policy rate before the first quarter of the next fiscal year will inflict damage on the ongoing effort to revive Covid-19 hit economy. Since June 2020, the committee has kept the policy rate unchanged at 7 percent to support the economy, which was badly hurt due to Covid-19 pandemic and recorded negative 0.4 percent GDP growth in FY20.
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