KARACHI: Analysts, making conservative estimates, expect that the State Bank of Pakistan (SBP) will maintain the monetary policy rate at 13.5 percent for next two months.
The central bank is all set to announce its two-month Monetary Policy on Monday November 29, 2010. Analysts are of the view that the SBP will prefer to keep the policy rate untouched for the next two months. The government’s renewed effort to raise more tax revenue, to bring the fiscal deficit down at around five percent, restriction of external deficit, subdued private off-take and low interest rates are the reasons economic pundits cite in this analysis.
“Given regional monetary tightening, the relevent question that arises is whether Pakistan will follow suit in the upcoming review or delay,” Muzammil Aslam of Jhangir Siddiqui Research Group viewed.
He said regional economies were concerned over rising inflationary expectations as a result of the QE2 (quantitative easing) policy of the United States and improving condition of emerging economies.
While firming up their monetary expectations, analysts are ‘very cautiously’ keeping an eye on voting patterns in the September 29th meeting of Monetary Policy Committee (MPC) of the Central Board and the QE2-led global monetary multiples contraction and directly manifest in higher commodity prices.
“A contrast between the meetings held on September 29 and July 29 was the voting pattern. Six members voted for a hike compared to two against in September compared to unanimous consensus over a hike in the July review,” said Aslam. He recalled that in the September meeting, members had highlighted fiscal expansion because of their concern over higher expenses arising from rehabilitation of the flood affected citizens.
Additionally, members were also concerned over the uncertainty over the actual extent of damages sustained in the flood and the government’s lackluster efforts to boost revenue collection.
The analyst revealed that in case of inflation, the committee expected a temporary upturn due to the supply shock and that it was likely to revert back to the 12 percent mark next year.
“Due to financial stress, members were of the view that even without an upward correction in the policy rate, there would be upward pressure on yields, driven by market sentiments, due to increased public sector borrowing.”
There have been many changes since the announcement of the previous policy rate on September 29, he indicated. Keeping in view, the remarks of the MPC, it is believed that fiscal reforms are starting to take shape he said adding that the government had already announced flood taxes to come in effect from Jan 1, 2011, and the controversial reformed GST has also been approved by Parliament.
Contrary to the SBP’s expectations, the current account deficit is in control and emerged at $533 million during July-October, down from $1.17 billion in the corresponding period last year.
Real interest rates are still hovering around near zero level, despite the supply shocks and elevated inflation of 14.17 percent recorded in the first four months of the current fiscal year.
Again, contrary to the SBP’s anticipation, the market’s yields remained constricted due to ample liquidity in the system, the analyst pointed out.
“This is reflective of the present benchmark 3M treasury bill yield of 12.75 percent against 12.80 percent recorded before the last DR hike,” he said. Overnight rates during the current month have been averaging around 12 to 12.5 percent, which also illustrate improved liquidity in the system.
“Hence, we believe, the MPC will consider all major factors and choose to keep the rates intact for the next two months,” Given the fiscal outlook, Aslam said the implementation of reformed GST and QE2 would definitely attract the central bank’s attention to rising inflationary expectations. “The reformed GST would be implemented primarily on the services sector, which would inflate the prices of a few commodities in the quantum of two to three percent,” he said.
This is will likely be offset with a decline in sales tax rate and the effect on the key consumable components like oil, electricity, steel, natural gas. Essential food items and pharmaceuticals are to remain exempted from the RGST.
“We expect a neutral impact on the market and a positive one on the country’s macros; in the shape of incremental revenues and strong public finances”, he elaborated.
On the QE2 front, Aslam said the stimulus will be offset by rising Western concerns and policy tightening by the regional economies that would help stem the price hike on commodity side. “We expect regional inflation to trail off in the next six to eight months,” he indicated.
