The SBP has increased policy rate by 25bps to 10.25% (discount rate 10.75%), against market consensus of status quo. This takes cumulative increase in interest rates to 450bps since Jan’18. The central bank acknowledges the efficacy of recent macro adjustments in improving the current account deficit and keeping headline CPI moderate. But it is quick to point out that (i) the current account deficit remains high and the decline is gradual, (ii) core inflation is high at 8.4% and creeping up partly on second-round effects of PKR devaluation and hikes in gas/power tariffs, and (iii) fiscal deficit will likely be higher in 1HFY19 than same period last year.

Recall, current account deficit in 1HFY19 stood at US$7.7bn (vs. US$7.6bn last year) and average CPI during the same period was 6.1% against 3.8% yoy last year (core inflation of 8.0% vs 5.5% yoy). SBP continues to project inflation range of 6.5-7.5% during FY19.

Despite bilateral flows from Saudi Arabia – more due from UAE and China – Fx reserves have decreased to US$8.2bn from US$9.8bn in Jun’18, due to still-high twin deficits. The central bank realizes that a high fiscal deficit (despite PSDP cut) will continue to keep current account deficit elevated. Hence, it sees the need for greater monetary tightening to counter the fiscal policy. This follows the supplementary budget where government overweighed pro-growth measures over meaningful tax increases.

According to Intermarket Securities Limited, unless there is substantial improvement in current account deficit and inflation outlook, SBP will increase policy rate again in Mar’19 MPS.