Karachi, November 17, 2021 (PPI-OT): Aggressive tightening of 100bps expected in the upcoming preponed MPS announcement

Aggressive adoption of unpopular decisions to coincide with the stipulations of the IMF are being taken alongside SBP’s policy changes. Simultaneously, Pak Rupee lost nearly 15% of its value against US Dollar, since the peak in May’21, and it continues to transmit into general inflation and requires more tightening measures from State Bank of Pakistan (SBP) after the Cash Reserve Requirement (CRR) hike of 100bps to 6%. We expect a 100bps hike in the upcoming MPS announcement to factor in currency adjustments and relieve inflationary pressures.

SBP prepones instead of an emergent meeting

After a move to squeeze c. Rs170bn (nearly 0.7% of M2) money supply in the economy, increasing CRR by 100bps to 6%, SBP has preponed the upcoming Monetary Policy Statement (MPS) announcement, by a week, to Nov19’21. We believe that the meeting has been brought forward by SBP to be able to take an aggressive step in monetary tightening where we expect a policy rate hike of 100bps to 8.25%. The increase in reserve requirement has also pushed the secondary yields slightly, where 6M T-bill yield stands at 8.97% as at Nov16’21, near to the recent broad inflation print of 9.2% for Oct’21.

Unpopular decisions are inflationary

The resumption of IMF program has called forth various unpopular decisions which include taking back the Rs170bn tax concessions, increasing electricity tariff, introduction of Finance Bill with Rs400bn of new tax measures, approval of SBP Amendment Bill, increasing the pace of PDL collection as budgeted, etc. Most of these measures are inflationary in nature while the weakening of Rs/US$ parity also continues to transmit into imported inflation, primarily fuel. These set of measures have stubbornly taken a position of being a pre-requisite to resuming the Fund’s program which not only entails US$1bn in 6th tranche but also opens up the window of external financing requirements from multilateral and bilateral agencies.

There is more than a 100bps room

With mounting inflationary expectations and rising secondary market yields, in the backdrop of weakening of Rs/US$ parity, we expect SBP to increase policy rate by 100bps. The 6M T-bill yield is currently 173bps higher than the policy rate and 73bps higher than the discount rate. The idea of bringing the MPS announcement forward will likely remove uncertainty for investors while factoring in the recent currency adjustments. With this tightening, SBP will also likely take away excess steam from aggregate demand and more specifically automobiles (transport group imports have surged 140% to US$1.5bn in 4MFY22 according to PBS).