Monetary Policy on January 31st; analysts expect interest rates unchanged at 10pc

KARACHI: The meeting of the Monetary Policy Committee (MPC) will be held on Thursday, January 31, 2019 in Islamabad, followed by the press conference to be addressed by the State Bank of Pakistan (SBP) Governor Tariq Bajwa to unveil Monetary Policy decision.

After back to back hike since May 2018, analysts expect State Bank of Pakistan (SBP) to keep policy rate unchanged at 10 percent this week. [the_ad id=”31605″] “The key reasons for our conviction are subdued inflationary readings since last monetary policy, elevated real interest rates level, compared to historical average and lower anticipated current account deficit from January onwards, due to sharp decline in oil prices,” an analyst at Sherman Securities said.

Inflation reading for the month of January 2019 is expected at 6.9 percent, corresponding to a MoM inflation of 0.7 percent during the said period. Consequently, the inflation during July-January (2018-19) will average in at 6.2 percent as opposed to 3.9 percent recorded in the corresponding period last year.

House rent index stands due for a revision in the month of Jan, where analysts expect a muted revision of 0.5 percent MoM owing to couple of high profile negative developments in the country’s housing and real estate market. To this note, the highest revision in the recent history was witnessed in second quarter of 2018, where the average rentals were revised by 3.1 percent MoM where as the average long term rental index revision stands about 0.5 percent MoM.

Furthermore the electricity index, which contributes 4.4 percent in CPI basket, is expected to be revised by 7.0 percent – 8.0 percent. However, this is expected to be countered by 5.0 percent cut in petroleum prices, which contained the head line inflation somewhat.

Food basket, which contributes around 35 percent in inflation basket, is expected to depict a MoM inflation of 0.8 percent MoM which could be in anticipation of the money budget which was announced in the later half of the month.

“With the mini budget now out of the way, we may realize some correction in the prices of food items in the coming month which could contain the inflation during that period. However, its pertinent to note that food index has shown deflationary trends in the past couple of months, thus eroding the international premium that was historically maintained,” a report issued by BIPL Securities said.

Consequently, any disruption in supply chain, depreciation in currency or culmination of winter season may therefore trigger a sudden spike in food inflation.

“With real interest rates hovering around 400 bps, we don’t see any need for a hike in interest rates in the upcoming monetary policy. However, with current account deficit showing little signs of improvement, the currency may witness another bout of depreciation which may mean a spike in inflation. Consequently, we expect the central bank to maintain a wait and see approach and keep the interest rates at the current levels,” BIPL Securities report added.

With participation picking up in the longer tenor government instruments, the market may be seeing interest rates peeking out or very close to peaking out. A better picture is likely to emerge over the coming months as there will be more clarity on government’s decision to whether or not approach IMF.

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