Upcoming MPC: Majority expect status quo but a greater divide is now visible

A majority of participants still expect the Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) to keep the discount rate unchanged next week, but a greater divide between those who expect a status quo and ones who see a rate-hike is now visible.

A poll, consisting of 68 participants, conducted by Topline Securities showed that 65% expect the SBP to maintain the discount rate at 7%. However, while still a majority, their overall share has reduced from an overwhelming 89% in the previous poll (62 participants), signalling at a possible shift towards an interest-rate hike in coming months.

The MPC of the SBP will meet on Monday, September 20, 2021, and will issue the Monetary Policy Statement the same day.

In the previous announcement, the key interest rate was kept unchanged at 7% for the next two months.

“At its meeting on 27th July 2021, the MPC decided to maintain the policy rate at 7 percent,” read the monetary policy statement . “Since its last meeting in May, the MPC was encouraged by the continued domestic recovery and improved inflation outlook following the recent decline in food prices and core inflation.

“In addition, consumer and business confidence have risen to multi-year highs and inflation expectations have fallen. As a result of these positive developments, growth is projected to rise from 3.9 percent in FY21 to 4-5 percent this year, and average inflation to moderate to 7-9 percent this year from its recent higher out-turns.”

However, the expectation of an interest-rate hike has gathered some momentum in recent weeks.

The Topline Securities poll said that about 65% of the participants are expecting no change in the policy rate in the upcoming MPC, compared to 89% in the previous poll.

One-fourth of the participants expect an increase of 25bps, while 10% of the participants anticipate an increase of 50bps or above. None of the participants expect a cut in the policy rate, added the report.

Meanwhile, Topline Securities itself expects a 25 bps increase in the policy rate in Sept 2021 MPS, “given the recent vulnerabilities in the current account, higher-than-expected SPI readings suggesting no let down in CPI inflation and the start of discussions with the IMF on resumption of the program.”

The policy rate was last changed in June 2020, when MPC decided to cut it by 100 basis points to 7%, keeping it unchanged since then. Back then, the MPC noted that the priority of monetary policy has shifted toward supporting growth and employment amid a slowdown in the domestic economy.

Meanwhile, when asked about changes in the policy rate in 2021, 54% of the poll participants expected an increase in the policy rate in 2021. Around 44% of the participants are expecting an increase in the policy rate by 50bps during 2021, while 10% of the participants are expecting a rise of 100bps or above during the year.

Regarding the currency exchange rate, 39% expect the rupee to be between 170-175 by December 2021.