The central bank, which is due to unveil its monetary policy stance for next couple of months coming Friday, is expected to maintain the status quo, mean keep the discount rate intact at the current 9.5 percent.
The market analysts believe that the State Bank of Pakistan (SBP) had slashed the policy rate by a cumulative 250 basis points (bps) since June 2012.
“We expect the central bank to maintain its stance of a status quo this time as well, similar to last two MPS,” said Muniba Saeed of InvestCap Research.
The analyst bases her argument a controlled consumer price index (CPI) inflation that, she said, stood at 6.97% in Nov-12 when the regulator had cut the discount rate by 150bps to 9.50% in Dec-12.
“The same is now at 6.57% (Mar-13) thus making no case of a policy rate change,” Muniba insists.
Second argument she cites to support her outlook is the State Bank’s use of the discount rate as a tool to influence the private credit. The private loan off-take, the analyst said, still was depressed. “Therefore not warranting any increase in policy rate,” she added.
Though the SBP is expected to keep the 9.5 percent policy rate intact, this trend would likely be witnessing a reversal during the next fiscal year, FY14.
“With inflation expected to increase going forward in FY14 on account of reduction in subsidy on electricity and resurgence of core inflation, we expect the policy rate to be increased in FY14,” Muniba said.
Nevertheless, she said in FY13 the CPI was expected to settle between 7.5 and 8 percent as crop prices, cotton, wheat, sugar and rice, remained intact as well as international oil prices remained close to $100 per barrel.
The central bank, recently been using the discount rate to encourage private sector credit, had been unable to attain the desired impact on the same. “According to SBP officials, the central bank now plans to use other tools to achieve the goal,” claimed the InvestCap analyst.
Giving her outlook, the analyst said though factors like inflation and private credit were expected to influence the bank’s monetary policy stance, these are not anticipated to completely dictate the regulator’s doings.
“Even if CPI continues to remain within bounds and private credit subdued, with Pakistan looking forward to re-entering the SBA program in order to finance the prevailing deficit, we foresee the IMF to demand a rate increase for such funding therefore leading to further chances of a rate increase,” the analyst viewed.
Also, she said, with Pakistan’s inclusion in the IMF program and foreign exchange reserves thus replenished, the latter was expected to strengthen Pak Rupee and discourage further exchange rate based inflation going forward.
