JS Securities Limited – Morning Briefing

Karachi, February 01, 2019 (PPI-OT): Monetary tightening continues

Against street expectations, the State Bank of Pakistan (SBP) raised its benchmark policy rate by another 25bps to 10.25%, taking the tally to 450bps since Jan-2018 and at the highest levels in over 6 years.

From SBP’s perspective, a rate hike is also understandable, given that there has been insufficient tightening support from the fiscal side.

SBP would have no option, other than to continue a monetary tightening stance in the future; unless of course, much needed fiscal measures are undertaken, providing relief on the monetary front.

Policy rate pushed up 25bps further to 10.25%

Against street expectations, the State Bank of Pakistan (SBP) raised its benchmark policy rate by another 25bps to 10.25%, taking the tally to 450bps since Jan-2018 and at the highest levels in over 6 years. Ideally, the apex bank could have done without a rate hike at this point, as in their own words, key monthly indicators are showing visible signs of deceleration in domestic demand.

Additionally, financial inflows are expected from friendly countries, which will also help provide some relief to the external account. However, from SBP’s perspective, a rate hike is also understandable, given that there has been insufficient tightening support from the fiscal side. For this very reason, we had initially assumed 100bps increase during CY19, of which 25bps is already realized. Hence, SBP would have no option, other than to continue a monetary tightening stance in the future; unless of course, much needed fiscal measures are undertaken, providing relief on the monetary front.

Key highlights of the SBP’s MPC meeting

The key points highlighted by the central bank in its latest Monetary Policy Committee (MPC) meeting are presented below:

Although inflation for 1HFY19 is higher than last year, there has been a slight slowdown in the last two months on the back of declining food prices and a downward adjustment of POL prices. Despite this, core inflation has continued to edge upwards.

The central bank has maintained its forecasts of FY19 average inflation at 6.5-7.5%, where we also believe CPI should fall within this range unless oil prices move sharply.

Real GDP growth for FY19 is forecasted at around 4.0% by SBP, well below the initial target of 6.2% and 5.8% in FY18. Incoming news are not very positive from either agriculture or large scale manufacturers.

Although private sector credit has almost doubled this year, it is mostly attributable to higher procurement costs, continued capacity expansion in power and construction-allied industries and ample liquidity with banks.

The government borrowings from SBP are relentlessly pursuing a northwards trend, up 4.3x from the same period last year (1st July 2018 to 18 Jan 2019). This could have inflationary implications in future periods.

We reiterate that a lethargic fiscal policy and heightened borrowings by the govt. from the central bank are the reasons that have compelled the SBP to continue a hawkish stance.