Pakistan Economy: Monetary firepower remains relevant
- The Monetary Policy Committee (MPC) of the SBP is scheduled to announce monetary policy tomorrow (Jul 16’19), where we expect it to raise the policy rate by another 100-150bps (policy rate of 13.25-13.75%) its 8th hike since Jan’18.
- Ensuing the IMF’s Executive Board approval for the 3yr ~US$6bn EFF program, this upcoming monetary policy holds significant importance, as it will confirm the monetary elements of policy framework the SBP will follow.
- Our rate hike expectation is premised on i) steep rise in inflation in 1QFY20 - though largely driven by adjustments in energy costs and taxation measures – and ii) a need for more tight monetary policy to ensure macro-stability, particularly on the external side.
- For the month of Jul’19, we expect headline inflation to rise sharply to 10.45%YoY vs. 8.89%YoY in the preceding month and 5.83%YoY in Jul’18. This sharp increase in inflation primarily stems from i) utility rate hike (i.e. upward revision in gas tariffs) and ii) quarterly housing rent adjustment.
- From the market’s vantage, investors are keenly awaiting the upcoming monetary policy decision (signified by drab volumes) and results season (including annual payouts) to re-position portfolios accordingly. We believe wider expectations of a 100bps rate hike are largely priced-in, where a surprise both on upside & downside could sway investor expectations accordingly.
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