Karachi, November 28, 2022 (PPI-OT): Pakistan Economy: MPC surprises the masses

The State Bank of Pakistan (SBP) increased the benchmark interest rates in the country by 100bps to 16%, contrary to the market’s expectations. The central bank based this on the persistence of inflation in the economy.

Headline CPI inflation has averaged ~25.5% in the 4MFY23 period, with core inflation averaging 15% in the first four months of the fiscal year. The majority of the inflationary pressures can be attributed to heightened food inflation, among other factors. SBP has revised its inflation estimates for FY23 upwards from a previously held range of 18%-20% to 21%-23% in its latest MPS – indicating CPI averaging ~18.8%-21.8% for the remainder of the fiscal year.

For FY23, the SBP kept its external and growth forecasts unchanged from the last time around, wherein the SBP forecasts the economy to grow at 2% in FY23, with a Current Account Deficit of ~3% of GDP.

SBP indicated that any further monetary actions would be based on incoming data – which we believe would continue to be lesser-than-optimal going forward. With inflation likely to remain elevated during 2HFY23 as well, the new year may see SBP maintaining a hawkish stance on MPS, specially if the currency weakness persists.

From the vantage of the capital markets, the market and the business community is likely to react negatively to the recent hawkish stance employed by the central bank as cost of doing business increases, among other spillover effects. In the near term, Commercial banks are expected to witness NIMs squeezing, while the highly levered cyclical sectors are expected to see an increase in financial costs. On the other hand, the hike would bode well for relatively cash-rich Oil and Gas Exploration Sector.