Pakistan Strategy: Monetary Policy - It is blowing hot & cold!
- In a surprising move, the SBP has yet again shifted to ‘wait & see’ approach by keeping policy rate unchanged at 6% in its latest bi-monthly policy review. To note, 13 out of 21 analysts polled by Bloomberg had expected a 25bps hike.
- SBP has cited three reasons: (i) inflationary pressure remains strictly in check, (ii) recent policy measures (devaluation, exports incentives, rate hike in Jan’18) may take time to fully unfold the desired impact, and (iii) government’s plans to raise FX.
- While CPI path has turned favorable in the past two months, current FX reserves and CAD forecast for FY18/19E warrants more cautious approach, in our view, given risks of delays & disappointment on government’s plans on FX reserves build-up.
- Resultantly, we maintain our view of cumulative 75bps hike in May and Jul’18. We flag that expected benign CPI in Mar/Apr’18 may keep chances of stable rate in May’18 MPS on the table, though we assign low probability to it.
- Rebuilding of FX reserves remains crucial for the markets to share the optimism expressed by SBP. We see limited impact on the equity market though money market may see multiple implications.
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