The monetary policy committee of State Bank of Pakistan (SBP) will convene on Friday (March 19, 2021) to announce the monetary policy for the next two months. We expect the SBP to keep policy rate unchanged at 7% in the upcoming monetary policy statement. To recall, the Monetary Policy Committee (MPC) convened last meeting in Jan’21 and noted that improvement has been witnessed in the overall domestic recovery, which has aided consumer and business confidence. Therefore, in our view, SBP might consider keeping the rate unchanged in order to boost the domestic demand despite running a negative interest rate of ~2%. Moreover, the statement also hinted at a very gradual and measured monetary tightening stance when the need arises. It also highlighted that the near term inflationary expectations remain moderate. If we look at the numbers, average inflation for 8MFY21 settled at 8.2%, within the range provided by the SBP (7-9% for FY21). Therefore, it seems likely that the central bank would let the real interest rates remain negative in the medium term.

On the external front, Current Account Deficit, in the month of Jan’21, was down by 55% YoY to USD 229mn compared with deficit of USD 512mn during Jan’20. On MoM basis, deficit was down by 65%, mainly due to 12% (USD 697mn) decline in the total imports. On YoY basis, the primary reason behind the decline in deficit was 2% YoY (USD 52mn) and 19% YoY (USD 367mn) rise in total exports and remittances, respectively. On the other hand, PKRUSD parity gained positive momentum with PKR appreciating 2% CY21TD.

Having said that, keeping in view the recent increase in international oil prices, rising food prices and tariff hikes by the government, we expect inflation to increase significantly in 4QFY21 which will result in a 50bps hike by the SBP in May’21 MPS, we believe

Courtesy – AHL Research