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Pakistan Economy_MPS_Expect a 150bps hike

MPS: Expect a 150bps hike

SBP announced its half-yearly schedule of Monetary Policy Committee (MPC) meetings where the next meeting is scheduled on May 23rd, 2022. We expect the central bank to increase the benchmark interest rates by another 150bps to 13.75%, the highest it has been in over a decade.
 Owing to the current commodity super cycle and questionable resource management, the country is experiencing soaring trade deficit which is depleting the import cover and thus putting pressure on currency. Unless the currency finds its equilibrium position, we may see the interest rates rising even further in the future.
 Secondary market yield curve is currently in inverted shape with short term yields (6M) standing at 14.9% while the long term yields (on 10yr papers) currently hovering around 12.9%. Higher short term yields also reflect street’s consensus of yet more rate hikes in the short term as commercial banks take full advantage of complete stop to budgetary borrowings from the central bank.
 GoP is faced with a dilemma of unwinding the subsidy program on fuel consumption, which will entail significant political cost, and stopping the cash hemorrhage which is arising as a result of the subsidy program. At the same time, the pressure is also building to secure the IMF funding which will give some stability to PkR amid rapid reserve deple-tion.
 Given the political costs associated with the decision, the current setup is dithering over rolling back the subsidy program. This indecisiveness is putting huge strain on fiscal space which can not be sustained much longer. We believe that the country will need to in-crease fuel prices to curtail the arbitrage for outward smuggling which is creating a vi-cious cycle of increasing borrowing needs and thus increasing borrowing costs.