The monetary policy committee of State Bank of Pakistan (SBP) will convene on Monday (November 23, 2020) to announce the monetary policy for the next two months. We expect the SBP to keep policy rates unchanged at 7.00% in the upcoming monetary policy statement.
This is backed by our view on:
i. Inflation, which going forward is expected to somewhat ease off in the coming months. Two factors supporting our call of contained inflation in short-to-medium term are : Expected reversal in volatile food prices (staple goods mainly) on improving supply, and relatively lower international oil prices which has been a breather to the upside risk to energy component of inflation.
ii. The challenge of reviving aggregate demand given the changes in macros given outbreak of the Novel Coronavirus may further induce the SBP to stimulate the economy by not increasing policy rate at the moment, although we are running a negative interest rate of ~1.86%. However, going forward if the ‘second wave’ hits the economy hard, we might see the SBP reacting accordingly.
iii. Moreover, it seems the fixed income market is also signaling towards unchanged stance as there was no major change in the treasury bills yields of 3M, 6M and 12M in the recent auction (on November 18th, 2020) which were at 7.15%, 7.20% and 7.25%.
To recall, the Monetary Policy Committee (MPC) convened last meeting in September’20 after a period of 3 months and noted that since its last meeting (June’20), improvement was witnessed in the business confidence, as well as the outlook for growth as a result of decline in COVID-19 cases back then and timely provision of the stimulus package by the government and the SBP.