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Experts expect SBP interest rate to remain the same

State Bank to announce monetary policy on Friday

SAMAA | - Posted: Jan 21, 2021 | Last Updated: 1 month ago
SAMAA |
Posted: Jan 21, 2021 | Last Updated: 1 month ago
Experts expect SBP interest rate to remain the same
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The market expects the State Bank of Pakistan to maintain the policy or interest rate at 7% in its upcoming monetary policy announcement.  Research firm Topline Securities conducted a poll of 94 finance professionals in December and 75% believed the policy rate will remain unchanged. “We are also expecting no change in the policy rate,” said the Topline Securities note. “But we expect an increase in policy rate by 100bps (1%) in May and July,” it added. Topline Securities conducted a similar survey with 72 respondents in November which said 88% people believed the policy rate would be maintained. The research note added that the restoration of the IMF programme over next couple of weeks, an expected increase in energy tariffs and rising international oil and commodity prices such as sugar, scrap and palm oil has led to fewer people believing the policy rate will be maintained in January. While CPI inflation in January 2021 is likely to fall to around 6% because of a high base effect, it is likely to come in at between 9.5% to 10% during the second quarter of 2021. We expect the State Bank of Pakistan to maintain the status quo in the upcoming monetary policy announcement due on Friday. Another research firm, Sherman Securities, also expects the State Bank to maintain the status quo. “Our monetary policy outlook is based on lower inflation projections for January,” said its research note. “We estimate the Consumer Price Index [inflation] in January is likely to clock in close to 6%.” It added that the low figure of inflation this January is due to the high base effect from the significantly high year-on-year CPI figures (14.6%) last January. “We expect the SBP to increase interest rates in March by 1% followed by another 0.5% in the second announcement of the year to narrow down negative real interest rates by end of 2021,” the research note said. What role does the policy rate play in Pakistan’s economy? Controlling inflation and ensuring economic stability are two of the State Bank’s core functions. To achieve these goals, the central bank uses, among other tools, its policy rate. This is the rate at which commercial banks borrow money from the central bank’s discount window. The State Bank’s policy rate, revised every two months, affects every interest rate in the market. In other words, a higher policy rate means commercial banks will charge more, making borrowing more expensive for individuals, businesses and the government. Higher interest rates make loans expensive. Businesses, which rely on bank financing, stop new projects, the government cuts spending on development projects, and consumers stop availing auto finance, home loans and even reduce credit card use. In a nutshell, a higher interest rate shrinks economic activity and also slows down job creation. On the other hand, a lower interest rate encourages people and businesses to borrow more, which in turn increases consumption on the national scale. Since the overall demand is high, it makes the prices of goods rise, thus inflation increases. The role of the central bank is to maintain a level of interest rates that keeps inflation in check while also not reducing economic activity.
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The market expects the State Bank of Pakistan to maintain the policy or interest rate at 7% in its upcoming monetary policy announcement. 

Research firm Topline Securities conducted a poll of 94 finance professionals in December and 75% believed the policy rate will remain unchanged.

“We are also expecting no change in the policy rate,” said the Topline Securities note. “But we expect an increase in policy rate by 100bps (1%) in May and July,” it added.

Topline Securities conducted a similar survey with 72 respondents in November which said 88% people believed the policy rate would be maintained.

The research note added that the restoration of the IMF programme over next couple of weeks, an expected increase in energy tariffs and rising international oil and commodity prices such as sugar, scrap and palm oil has led to fewer people believing the policy rate will be maintained in January.

While CPI inflation in January 2021 is likely to fall to around 6% because of a high base effect, it is likely to come in at between 9.5% to 10% during the second quarter of 2021.

We expect the State Bank of Pakistan to maintain the status quo in the upcoming monetary policy announcement due on Friday.

Another research firm, Sherman Securities, also expects the State Bank to maintain the status quo. “Our monetary policy outlook is based on lower inflation projections for January,” said its research note.

“We estimate the Consumer Price Index [inflation] in January is likely to clock in close to 6%.”

It added that the low figure of inflation this January is due to the high base effect from the significantly high year-on-year CPI figures (14.6%) last January.

“We expect the SBP to increase interest rates in March by 1% followed by another 0.5% in the second announcement of the year to narrow down negative real interest rates by end of 2021,” the research note said.

What role does the policy rate play in Pakistan’s economy?

Controlling inflation and ensuring economic stability are two of the State Bank’s core functions. To achieve these goals, the central bank uses, among other tools, its policy rate. This is the rate at which commercial banks borrow money from the central bank’s discount window.

The State Bank’s policy rate, revised every two months, affects every interest rate in the market. In other words, a higher policy rate means commercial banks will charge more, making borrowing more expensive for individuals, businesses and the government.

Higher interest rates make loans expensive. Businesses, which rely on bank financing, stop new projects, the government cuts spending on development projects, and consumers stop availing auto finance, home loans and even reduce credit card use. In a nutshell, a higher interest rate shrinks economic activity and also slows down job creation.

On the other hand, a lower interest rate encourages people and businesses to borrow more, which in turn increases consumption on the national scale. Since the overall demand is high, it makes the prices of goods rise, thus inflation increases.

The role of the central bank is to maintain a level of interest rates that keeps inflation in check while also not reducing economic activity.

 
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