SBP’s next Monetary Policy Committee (MPC) meeting will be held on Apr 29, 2024.
Topline Research polled key market participants on expectations over policy rates and key macro estimates to gauge the view on the monetary policy outlook. According to the survey, 51% of participants expect the policy rate to remain unchanged at 22%, while the remaining 49% anticipate a policy rate cut. No participants expect an increase in interest rates.
Among those expecting a cut, 2% foresee a reduction of 25bps, 12% expect a cut of 50bps, 29% anticipate a cut of 100bps, and 6% of participants expect it to decrease by more than 100bps.
In the last monetary policy survey conducted on Mar 13, 2024, 55% of participants expect the policy rate to remain unchanged at 22%, while the remaining 45% anticipate a policy rate cut. Among those expecting a cut, 2% foresee a reduction of 25bps, 10% expect a cut of 50bps, 24% anticipate a cut of 100bps, and 9% of participants expect it to decrease by more than 100bps.
In response to our second question regarding the timing of the first rate cut in case of no change this time, 71% of participants expect the first cut to occur in June 2024, 18% anticipate it in 3Q2024, and 11% expect it to be in 4Q2024.
In the latest MPC meeting on March 18, 2024, SBP decided to keep the policy rate unchanged.
While arriving at the decision, MPC noted that inflation, in line with earlier expectations, has declined noticeably from 2HFY24. However, MPC observed that despite the sharp deceleration in February, the level of inflation remains high, and its outlook is susceptible to risks amidst elevated inflation expectations. This warrants a cautious approach and requires continuity of the current monetary stance to bring inflation down to the target range of 5-7% by Sep-2025.
The committee reiterated that this assessment is also contingent upon continued targeted fiscal consolidation and timely realisation of planned external inflows.
In response to the question about the expected Policy Rate in Dec-2024, 41% of the participants anticipate the rate to be 16-18%, and 51% anticipate the policy rate to be 18-20%. Additionally, 4% expect the rate to be 14-16%, and another 4% expect the rate to be 20-22%. On the other hand, no one expects it to be below 14% or above 22%.
Since the last MPC meeting on March 18, 2024, new developments have taken place, which the central bank committee will likely consider in the upcoming meeting.
These include: (1) a fall in CPI inflation from 23.1% in Feb-2024 to 20.7% in Mar-2024, (2) SBP FX Reserves at US$8bn despite US$1bn Eurobond payment, (3) Pakistan posting a Current Account Surplus of US$128mn in Feb-2024 compared to a Current Account Deficit of US$303mn in Jan-2024, (4) 2.5% increase in international oil prices and average 3% increase in local fuel prices, (5) the rupee largely remaining stable against the US dollar, (6) escalation in tension between Iran and Israel.
Furthermore, in the recent T-Bill auction held on April 17, we saw mixed participation in 3-month and 12-month bonds, where the cut-off yield remained unchanged at 21.66% and 20.89%, respectively.
We believe that the SBP will remain cautious despite the above encouraging trends and adopt a ‘watch and see’ approach until the inflation trend maintains its fall.
Key risks to the inflation trajectory include an increase in international prices, a delay in the release of IMF funds, the IMF demanding additional tax measures to meet revenue targets in case of any shortfall, and pressure on the dollar against the rupee, mainly due to a delay in getting dollar inflows.
We believe the SBP will keep the policy rate at 22% in the upcoming MPC meeting.
Courtesy – Topline Pakistan Research