KARACHI: As Pakistan’s central bank prepares to announce monetary policy on Friday, the country’s financial experts predict a maximum increase of 75 basis points in the key policy rate.
The move follows a meeting between top officials from the International Monetary Fund (IMF) and the State Bank of Pakistan (SBP) in Karachi on Wednesday.
In February this year, the State Bank of Pakistan (SBP) had already increased the policy rate by 25 basis points to 10.25 percent.
“We expect that the central bank would increase the policy rate by 50 basis points to control the aggregate demand and rising fiscal and current account deficits, especially at a time when Pakistan is about to join the IMF program," Muhammad Sohail, CEO of Topline Securities, said.
The SBP has also revised its projection for economic growth by 0.5 percent to 3.5-4 percent for the current fiscal year (FY19), due to slowdown in the growth of the agriculture sector and stabilization measures taken to preserve macroeconomic stability.
Pakistan’s inflation is constantly increasing since last year with the central bank anticipating 6.5-7.5 percent for the full year. The inflation surged to 8.2 percent in the month of February 2019.
“We expect that inflation will increase to 9.12 percent in March compared to 3.25 percent recorded in March 2018. The uptick in inflation is due to unfavorable exchange rate movement resulting in the surge in prices of imported products and upwards adjustment in tariff of utilities. We expect that the policy rate would be increased by 75 basis points," said Samiullah Tariq, Head of Research at Arif Habib Limited, a brokerage firm.
“We can expect up to 50 basis point increase in policy rate because we are expecting the inflation going up in coming days, to over 9 percent," Ahsan Mehanti, Chief Executive, Arif Habib Corporation, predicted.
In recent comments to journalists in Islamabad, Finance Minister Asad Umer had hinted at the possibility of a gradual increase in gas and electricity prices which could lead to monetary tightening.
“We are expecting 25-50 basis point increase in the policy rate because the inflation trajectory is showing more than expected growth. It seems that gas and electricity rates will be further increased," Fahad Irfan, Head of research at Alfalah Securities, said.
However, some experts say they don’t expect any change in the policy rate. “The demand slack is clearly evident resultantly current account is converging towards its long-term trend. Moreover, growth slowdown is more than expected. Further monetary tightening may dampen the growth prospect and hence revenue growth. This will push fiscal balance further higher. The fiscal balance is now the prime concern, but this time it has more to do with subdued revenue growth. Hence we expect no change in policy rate," Muzzammil Aslam, a senior financial expert, said.
Meanwhile, Khurram Schehzad, a senior financial analyst and CEO of Alpha Beta Core, a financial advisory firm, said that “further monetary tightening would increase fiscal deficit in the backdrop of a choking economy.”
“I expect that the state bank would maintain the status quo,” Schehzad added.
With Pakistan expected to ink a deal with the IMF by the end of April, analysts hoped it would put an end to the atmosphere of uncertainty which is prevalent across the country.