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Flash Note: Pakistan Economy: Monetary Policy - Early announcement likely

• Monetary Policy announcement could be sooner than usual this month. Its usually around end of month where the last two monetary policy announcements (in March and May) were on or after the 25th of the month.
• This is likely because of timing of elections, which are scheduled on July 25. Consequently, State Bank may be expected to announce a date soon.
• We have recently raised our interest rate forecast and expect hike of further 200 basis points in 2H2018, which will take State Bank’s Policy Rate to 8.5% by December 2018. In the upcoming monetary policy announcement, we expect interest rates to increase by 50-100 basis points.
• This anticipation of rate hike bodes well for banking sector’s profitability. From 2019 onwards, banks are expected to witness strong earnings growth owing to expected rise in interest rates and strong balance sheet growth. Our top picks in the sector are MCB Bank (MCB), Bank Alfalah (BAFL) and Bank Alhabib (BAHL).
• Expectations of hike in interest rates is because of sharp deterioration in external account (expected Current Account Deficit of US$18bn for FY18) and likely IMF program in 2018 would entail aggressive monetary tightening in upcoming monetary policies. Furthermore, CPI inflation is also expected to average around 7% in 2018-20 on the back of currency devaluation and rising oil prices. In the last 2-years, SBP has maintained positive real interest rates of around 150-200 basis points.