Karachi, November 22, 2021 (PPI-OT): Pakistan Economy: Rate hike paves way for Staff Level Agreement

In a move that surprised the market’s expectations on the higher side, SBP raised the benchmark interest rates by 150bps. The move marks a structural shift in central bank’s policy from stimulating growth to now targeting stabilization amid rising risks emanating on the external account.

The rate hike brings real interest rates closer to ZERO, having stayed well below -2% mark during the pandemic as SBP strived to protect economy from the negative impact of the COVID-19.

With rate hike in the bag, the Pakistan has broadly met all the requirements raised by the IMF paving way for the revival of loan program. To this end, the news of country reaching staff level agreement finally broke this morning, notwithstanding any last-minute hiccups, country is expected to receive US$1.1bn and unlocking further funding from other bilateral partners.

A hike of 150bps was higher than our forecast of 100bps and may set ground for further rate hikes in the coming months as focus shifts back to stabilization amid mounting risks to external account and as SBP may look to target mildly positive real interest rates.

Money market yields had already peaked at 9% before the MPS and ordinarily the equity markets may have seen a heavy correction in today’s trading session as the news of higher than anticipated rate hike was further compounded by soaring CAD. However, the staff level agreement with IMF is likely to be positively received by the market and may keep downside in check.