Profit statements

A 100bp hike brings the key rate to 9.75pc

KARACHI: The State Bank of Pakistan (SBP) announced a 100 basis point hike in the policy rate following today’s Monetary Policy Committee (MPC) meeting. The increase aims to “counter inflationary pressures” and “ensure growth that remains sustainable”.

Although the term forward guidance was not used in the statement, the MPC said: “As a result of today’s rate hikes and given the current outlook for the economy, and in particular inflation and current account, the MPC estimated that the end goal of slightly positive real interest rates on a forward-looking basis was now on the verge of being achieved. Looking ahead, the MPC expects monetary policy parameters to remain broadly unchanged in the near term. “

Tahir Abbas, Head of Research at Arif Habib Limited, said: “The most important element is the forward guidance of the SBP in which MPC estimated that the end goal of slightly positive interest rates on a forward basis has almost been reached and that monetary policy is expected to remain broadly unchanged in the near term.

Earlier last month, in an exclusive interview with Profit, SBP Governor Reza Baqir explained, “In terms of the position of monetary policy has not been tightened, the pace at which you want to get there is in our opinion. faster. The reason this should be faster is that the rotation of the balance of risks from growth to inflation and the current account has been a little faster than expected. Now this post contains positive information and also contains information, which brought us to the fact that growth continues to be robust. Even with this political action, we are forecasting 5% growth for this fiscal year. “

The article continues after this announcement

The frequency of MPC meetings has increased as “the two-month period has turned out to be quite long as the world changes rapidly,” the governor said.

Market expectations

According to the Bloomberg MPC survey, the median estimate was 9.75%, in line with the SBP’s decision.

Standard Chartered Bank and Ismail Iqbal Securities estimated an increase of 50 basis points while Dawood Equities estimated an increase of 200 basis points. Only 4 of 47 respondents estimated a rise of less than 100 basis points, showing that the market was anticipating a somewhat aggressive rise.

This is important given the speculation and the messy way the money, debt and capital markets have functioned in the face of uncertainty over the policy rate.

The MPC called the uncertainty and the reaction of market players “unwarranted”. The statement reads: “Across all the tenors, secondary market yields, benchmark rates and cutoff rates in government auctions have increased dramatically. The MPC noted that this increase seemed unwarranted. Thus, the forward guidance provided remains important with market sentiment in mind.

“In my opinion, the forward guidance will reduce uncertainty in the money market,” said Samiullah Tariq, head of research at Pak Kuwait Investment Company.

Interestingly, the finance minister also decried the banks for their greed and went live on television to say, “We’re talking to the banks tomorrow. We will explain to them that they should not be doing such antics.

If you are interested in knowing what antics are, read this. The 3-month Treasury bill is 200 basis points above the policy rate. As a result, in the T-Bill auction on December 1, the government raised Rs 500 billion at a much higher rate than in the previous auction, where the government accepted much lower bids. This showed that the market expected the policy rate to rise much faster, which called into question the accommodative stance of the SBP and whether it would be backed by the banks.

“The increase was expected and despite increasing pressure on the SBP to take it slow, the language of the MPC indicates that more increases are imminent,” said Uzair Younus, director of the Pakistan Initiative at the Atlantic Council. .

Another comment on the statement comes from economist Ammar Habib Khan, who comments sarcastically: “Slightly amused and fun on a prospective basis should remain broadly unchanged in the near term. “

Inflation remains a concern

“Inflation dynamics have continued since the last MPC meeting, as evidenced by a significant increase in headline and core inflation in November. Due to recent higher than expected results, SBP expects inflation to average 9-11% for this fiscal year.

“Since the last meeting on November 19, 2021, activity indicators have remained robust as inflation and the trade deficit have further increased due to both high world prices and domestic economic growth.

Headline inflation reached 11.5% year-on-year and core inflation rose to 7.6% and 8.2% for both urban and rural areas, signifying accelerated growth in domestic demand.

The policy statement identified the cost of electricity, fuel, house rent, milk and vegetable ghee as the main contributors to inflation.

“Going forward, based on these dynamics and the expected evolution of energy prices, inflation is expected to remain within the revised forecast range for the remainder of the year. Thereafter, as global commodity prices retreat, administered price increases dissipate, and the impact of demand moderation policies materialize, inflation is expected to fall towards the target range over the medium term. from 5 to 7% during fiscal year 23. “

Fahad Rauf, head of research at Ismail Iqbal Securities, explains: “Obviously the SBP primarily targets inflation. If inflation remains above SBP expectations, this would pose upside risks to interest rates. “

Real sector

According to the MPC, the real sector continues to grow.

“High-frequency domestic demand indicators released since the last meeting, including power generation, cement shipments, and sales of fast-moving consumer goods and petroleum products, as well as continued strength in imports and tax revenues suggest that economic growth remains robust. The outlook for agriculture remains strong, supported by improved seed availability and an expected increase in the area under wheat.

At the same time, the robust growth of the sales tax on services also suggests that the tertiary sector is recovering well. “

Speaking of profit earlier, Baqir explained, “We are not doing this at a time when the economy is slowing down, there is a fundamental difference between this phase of monetary tightening, what I would say, of reduced accommodation, and this phase. of 2019 At that point the economy was slowing down, but there was a much bigger stabilization problem. It is a stage of moderation, the extent of growth. This is the step of taking action to avoid overheating. This is the step to break the history of boom-bust cycles. We have seen growth before, but where we have failed to maintain growth. “

External sector

“Externally, despite record exports, high world commodity prices have contributed to a significant increase in the import bill. As a result, the November trade deficit rose to $ 5 billion based on PBS data, ”the report said.

Imports reached $ 32.9 billion in the year, compared to $ 19.5 billion for the same period last year. “About 70% of this increase in imports is attributable to the sharp rise in world commodity prices, while the remainder is attributable to stronger domestic demand,” the statement said.

On Monday, remittances grew weak 1% year-on-year, reaching $ 2.4 billion in November FY22 from $ 2.3 billion in November FY21. The impact of remittances on the current account deficit (CAD), which is due to be released in the coming days, can also be observed.

The current account deficit is projected at 4pc of GDP, which is higher than expected.

The MPC believes that the measures taken to stop the deterioration of the current account deficit are timely.

“The MPC noted that the current account deficit should be fully funded from external inputs. As a result, foreign exchange reserves are expected to remain at adequate levels for the remainder of the year and resume their growth path as world commodity prices weaken and import demand moderates. “

Fiscal sector

In fiscal year July-November 22, tax revenue growth was strong, driven by a generalized increase above the target for RBF tax collections (36.5% year-on-year).

However, the decision to forgo the oil exploitation tax resulted in a 22.6% drop in non-tax revenue compared to last year.

While spending on grants and grants is higher, the government aims to increase its revenue by removing certain tax exemptions and reducing current and development spending. This is in line with the austerity measures recommended by the IMF.