Pakistan Economy_Policy rate raised to 6.5%
MPC opted for a much restrictive stance in its May'18 MPS review where they decided to increase benchmark interest rate by 50bps with policy rate (TR) ending at 6.5% (DR: 7.0%). Despite headline inflation remaining contained at average 3.8% in 10MFY18, rate hike comes primarily on the back of upswing in core NFNE inflation in the previous month recording at 7.0%YoY (vs. average 5.6%YoY in 10MFY18) reflecting buildup of inflationary pressures within the economy. Additional catalyst supporting the MPC stance included: 1) rising current account deficit to US$14bn (up 50%YoY) accompanied by absence of foreign flows, 2) risk of economy being overheated and 3) recovery in commodity prices. However, in line with our previous estimates we still see room for more rate hikes in FY19 keeping in view the rising inflation (CPI to average 6.13%YoY in FY19) as well as elevated external account pressures (CAD projected at US$16.2bn in FY19F). In this regard, we believe MPC to increase interest rates further by 125bps in FY19F with TR/DR ending at 7.75%/8.25% by Jun'19.
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