Policy rate likely to increase by 100bps

The monetary policy committee of SBP will convene on Tuesday (December 14, 2021) to announce the monetary policy for the next one month (Next policy: Jan 24, 2022). We expect SBP to remain hawkish and continue monetary tightening by raising its policy rate for the third time since the beginning of FY22 but of a lower magnitude of 100bps than the last one (150bps in Nov’21) – taking the total cumulative increase in FY22TD to 275bps. With this, the revised policy rate is expected to be 9.75%.

Since the last monetary policy (Nov’21), the macros have been painting a bleak picture, especially inflation worries rumbling more clearly than before with each passing month. Inflation has averaged around 9.3% YoY in the first five months of FY22 vis-à-vis 8.76% YoY in SPLY. In Nov’21 alone, headline inflation clocked-in at 11.53% YoY which was the highest monthly YoY increase since Feb’20. For the next few months, this number is likely to remain in the double digits given the low base of last year. Moreover, the global inflationary pressures can also be felt arising from international energy and commodity prices which do not look ready to subside anytime soon. We have seen central banks in the regional markets reacting as consumer prices are being pressured by global supply-chain disruptions, costlier energy and food supplies.

In addition, another variant of COVID (Omicron) has emerged recently posing a concern to the overall economic recoveries across different regions. Although not much is known about the severity of this variant as yet, the policy makers will surely be monitoring this emerging situation closely. Despite these challenges, the performance of high frequency indicators (such as auto and cement sales) and LSM numbers (3MFY22: +5.15% YoY) clearly signal healthy signs of economic growth, thus, adding to the (demand-pull) inflationary pressures. Therefore, the prudent policy approach for the SBP would be to tack in a more hawkish path to manage these risks.

Courtesy – AHL Research

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