SBP Likely To Raise Interest Rates By 100bps In Upcoming Policy Review

SBP Likely To Raise Interest Rates By 100bps In Upcoming Policy Review
It is anticipated that the State Bank of Pakistan (SBP) will raise interest rates even further in the impending policy review next month to battle the growing inflation.

The SBP is expected to increase its policy rate by 100 bps (basis points) to 21% during this meeting, according to a note from Arif Habib Limited (AHL), which will be held on April 4th.

By soliciting input from diverse sectors, the company conducted a survey (poll) to learn what the market anticipates from the next monetary policy.

According to survey results, 57.7% of all respondents believe the SBP will raise the policy rate, with 30.8% anticipating a rate rise of 100 bps and 26.9% anticipating a rate increase of 200 bps. In all, 42.3% of respondents believe that the policy rate will stay at 20%.

The policy rate was raised to 20% this month by a massive 300bps. The Monetary Policy Committee recommended the decision be made on the danger of inflation. The risks that were mentioned in earlier policy meetings had manifested and were now partially visible in the consumer price index (CPI) figures as a result of external and fiscal adjustments. In addition, the MPC updated its projection for the CPI for the year from 21-23% to 27-29%.

According to the AHL, "inflation in the next few months is projected to stay elevated as the impact of external and fiscal changes (including additional taxes, tariff increases, currency weakness, and the "Ramadan factor") unfolds.

"The average inflation rate for the eight months of FY23 was 26.2%, up from 10.5% during the same period in FY22. Core inflation keeps increasing each month as inflationary pressures widen and intensify, reflecting the knock-on effects of the depreciation of the PKR in the midst of continued debt repayments and decreased financial inflows," it noted.

The rupee has lost 1.2% of its value versus the dollar since the most recent statement on monetary policy was made in March. These external account problems continue despite a sizable reduction in the current account deficit, which was $242 million in January (the lowest level since March 2021), primarily due to lower imports, which were down 38% year over year as a result of the government's import restrictions and the drop in global commodity prices.

The cut-off rates for the three-month, six-month, and 12-month tenors climbed by 105 basis points, 95 basis points, and 120 basis points, respectively, in the most recent March 8 market Treasury Bills (T-Bill) auction. Since June 1998, there has been data available, and yields for all three tenors are now at historic highs.