Majority expect “No Change” in interest rate despite falling yields

SBP’s next Monetary Policy Committee (MPC) meeting will be held on Jan 29, 2024. In order to gauge the view on monetary policy outlook, Topline Research conducted a poll of key market participants on expectations over policy rate and key macro estimates. According to the survey, 68% of participants expect the policy rate to remain unchanged at 22%, while the remaining 32% anticipate a policy rate cut. Among those expecting a cut, 5% foresee a reduction of 25bps, 18% expect a cut of 50bps, 5% anticipate a cut of 100bps, and 4% of participants expect it to decrease by more than 100bps. No participants expect an increase in interest rates.

This is in spite of a surprise fall in T-Bill yields by 50-62bps in yesterday’s auction.

In response to the second question regarding the timing of the first rate cut in case of no change this time, 56% of participants expect the first cut to occur in Mar-2024, while 18% anticipate it in Apr-2024, 13% in Jun-2024, and 13% expect the first cut to be after Jun-2024.

In latest MPC meeting held on Dec 12, 2023, Pakistan Central Bank, State Bank of Pakistan (SBP), has decided to keep the policy rate unchanged at 22% which came in line with market expectations. The MPC reiterated its earlier view that the real interest rate continues to be positive on a 12 month forward looking basis and inflation is expected to remain on a downward path to achieve the inflation target of 5-7% by end-FY25.

They also reiterated that headline inflation will decline significantly in 2HFY24 due to contained aggregate demand, easing supply constraints, moderation in international commodity prices and favorable base effect.

Since the last MPC meeting, new developments have taken place which will likely be considered by the central bank committee in upcoming meeting. These includes; (1) rise in CPI inflation for Dec 2023 to 29.7% from 29.2% in Nov 2023, (2) Pakistan posted a Current Account Surplus of US$397mn in Dec 2023 vs Current Account Deficit of US$15mn in Nov 2023, (3) local fuel (petrol & diesel) prices have declined on average by 3% MoM, (4) stable International oil prices, and (5) rupee largely remained stable against the US dollar.

Furthermore, cut-off yields in the recent T-Bill auction have declined by 50-62bps with yields now standing at 20.49%, 20.40%, and 20.22% for 3, 6, and 12 months, respectively.

According to the Financial Times, Gita Gopinath, the International Monetary Fund’s first Deputy Managing Director, has warned central banks to proceed cautiously in cutting interest rates this year and has advised against fueling market hopes for rapid interest rate cuts.

In response to the question about the expected Policy Rate in June 2024, 60% of the participants anticipate the rate to be in the range of 18-20%, compared to 54% in the last survey. Furthermore, 23% of the participants anticipate the policy rate to be in the range of 20-22%, a notable increase from the 6% reported in the last survey. Additionally, 15% expect the rate to be in the range of 16-18%, down from 33% in the last survey. On the other hand, 2% of participants expect the rate to be in the range of 14-16%, while none expect it to be below 14% or above 22%.

Considering all the factors mentioned above, we also believe the SBP will keep the policy rate unchanged at 22% in the upcoming MPC meeting.

Courtesy – Topline Pakistan Research 

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