Karachi, January 21, 2022 (PPI-OT): Monetary Policy Statement: Expecting a Status Quo in Upcoming Monetary Policy Statement

The State Bank of Pakistan (SBP) is scheduled to announce Monetary Policy Statement (MPS) for the next two months on Monday 24th January, 2022. We expect policy rate to remain ‘Unchanged’ at current level of 9.75%.

Larger portion (~65%) of market participants expects policy rate to remain unchanged.

While we consider rates to remain unchanged in the upcoming Jan-22 monetary policy statement, but we expect higher policy rates in Mar-22 and subsequently in May-22. On a cumulative basis we expect a 100-150bps further rise in policy rate from c. 9.75% to 10.75% – 11.25%.

Status quo expected in upcoming monetary policy announcement

The State Bank of Pakistan (SBP) is scheduled to announce Monetary Policy Statement (MPS) for the next two months on Monday 24th January, 2022. We expect policy rate to remain ‘Unchanged’ at current level of 9.75%.

Market consensus remains skewed to “unchanged’ status SBP forward guidance on keeping near-term rates unchanged back in Dec-21 monetary policy statement, has meant a larger portion (~65%) of market participants expects policy rate to remain unchanged, 30% expects rate hike while remaining expects rate cut.

Looking at Dec-21 numbers, Inflation seems to be moderating

Dec-21, monthly inflation shown sign of moderating with mere m/m decline of -0.02% compared to previous 3months average of +2.3%m. The headline inflation recorded a +12.3%y growth during the month compared to previous, Nov-21, +11.5%y and +9.2% in Oct-21.

However, current month and remainder of FY22 suggests the otherwise

However, for Jan-22, leading SPI index, changes in petroleum prices and quarterly revision in house rental index, suggests +1.2%m increase. This will take Jan-21 national CPI inflation to +13.8%y. Similarly, with key decision on upward energy price adjustments still in the hanging amid ongoing negotiations with IMF, recent budgetary measures and upward trending international oil prices indicates to a stronger monthly inflation influx in the second half of FY22.

Real Interest rate seems far from mildly positive

Looking at 3months forward inflation (Jan-to-Mar) we forecasts average headline inflation would likely come in at +13.5%, bringing, and current real rates just under ~ 3%. This leaves significant room for policy rates to re-adjust upward, considering SBP targeting a gradual positive real rates.

Outlook: Rates to tighten as economic weaknesses show up

While we consider rates to remain unchanged in the upcoming Jan-22 monetary policy statement, but we expect higher policy rates in Mar-22 and subsequently in May-22. On a cumulative basis we expect a 100-150bps further rise in policy rate from c. 9.75% to 10.75% – 11.25%. For our policy rate call, we have mainly factor in a) double digit inflation, b) weak external account position, and c) elevated/volatile international commodity prices.