Analysts expect a cut in discount rate

Economic observers are expecting a downward revision as the State Bank of Pakistan (SBP) is all set to announce its monetary policy decision for the next couple of months on Saturday.

With current discount rate standing at 10 percent, the new one would be made public through a statement, said a spokesman of the central bank Wednesday.

The analysts are expecting a rate-cut ranging between 50 and 100 basis points primarily on the back of easing inflation numbers reported in the country.

During October, the Pakistan Bureau of Statistics reported the Consumer Price Index inflation standing at 5.82 percent year-on-year compared to 9.1 percent in same month of last year.

This southward movement of the backbreaking inflation figures, the analysts say, marks a 17-month low.

“This is the lowest inflation reading after Jun-13,” observed the analysts at Shajar Research.

During 4MFY15, CPI settled at 7.09 percent compared to 8.32 percent in the corresponding period of FY14.

“The below 6 percent inflation was mainly due to the base effect along with the decline in food perishable items,” said Abdul Azeem of InvestCap Research.

The analysts view that the low CPI created space for monetary easing.

“The declining trend in CPI clearly indicates the positive real interest going forward,” Azeem said.

Thus, he sees a possibility of cut in the discount rate in the upcoming monetary policy.

Explaining further, the analyst said falling international oil prices would support the widening trade deficit.

Moreover, he said, the expected inflow of $1.1 billion from International Monetary Fund, divestment of OGDCL shares and floating of Ijara Sukuk (Islamic bonds) could ease-off pressure on the rupee which, presently, is trading against dollar above Rs 102 mark on inter-bank and kerb markets.

However, a weak foreign exchange reserves position of the State Bank concerns Azeem.

The country’s dollar reserves, he said, stood at $ 4.6 billion that is bound to feel the heat of $ 150 million repayment the heavily-indebted country would be making this month.

Analysts at Shajar Research also believe that the banking regulator was likely to reduce the cost of borrowing for banks.

“Considering the increased corridor of real interest rates, we expect the central bank may opt for 50bps-100bps policy rate reduction in the November monetary policy decision,” the analysts said.

Azeem of InvestCap sees beyond next couple of months and tend to expect more monetary policy easing during FY15.

“With the assumption of 0.55 percent CPI for each remaining months of FY15 indicates (the) inflation (would clock in) at 7.2 percent YoY in FY15,” he said.

This, the analyst said, would be despite the fact that any upsurge in utility (electricity and gas) prices might nullify the impact of low oil prices on CPI.