Pakistan Economy: MPS outlook, status quo to remain
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The SBP is due to announce the May'17 MPS over the weekend (May 20'17) where we expect status quo as real interest rates (average +144bps in FY17F) standing at comfortable levels leave room for SBP to support GoP's ambitious growth targets (+6% GDP growth in FY18B), in our view. However, going forward reversal in the interest rate cycle seems likely in line with anticipation of mounting inflationary pressures where CPI/NFNE core inflation is projected to reach 5.1%YoY/5.8%YoY in CY17 (vs. 3.8%YoY/4.7%YoY in CY16). Moreover, increasing vulnerabilities on the external front in the form of: 1) soaring current account deficit (projected at 2.7%/3.8% of GDP in FY17F/FY18F) and 2) falling reserves (US$21bn/US$17.5bn in FY17F/FY18F) also strengthen the case for a hawkish monetary policy where we see a nominal 25bps hike in Nov'17.
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