EUR 4.29 For Business Accounts Only

Pakistan Economy - State Bank Increases Policy Rate by 150bps to 12.25%

 

• The State Bank of Pakistan (SBP) in its Monetary Policy meeting held earlier today announced an increase of 150 basis points in its Policy Rate to 12.25% (almost 8-year high), taking cumulative increase since Jan 2018 to 650bps. This was higher than market expectations.
• In a poll of 29 respondents by Bloomberg, only 4 had expected hike of 150bps. Three respondents expected a hike of 50bps, 2 expected 75bps, 15 expected 100bps and 5 expected 125bps change.
• The above increase of 150bps is higher than the 50bps increase in previous monetary policy meeting in Mar 2019. It comes right after the Staff Level agreement between the International Monetary Fund (IMF) and the government. We expect the IMF program to be approved in the next couple of months.
• The key concerns highlighted by the SBP are 1) external current account deficit, which has led to decline in foreign exchange reserves, 2) a rising fiscal deficit due to shortfall in revenue that has led to higher borrowings from SBP, 3) higher inflation due to rise in domestic fuel prices and rising food prices and 4) recent volatility in exchange rate.
• SBP expects inflation for FY19 to average in the range of 6.5-7.5%. It expects the country’s GDP growth to slowdown in FY19 (from earlier expectations of 3.5%) and to rise somewhat in FY20.
• The above rate hike will be negative for leveraged sectors like Cement, Steel and Fertilizer. Cash Rich companies like ENGRO, PTC, OGDC, PPL, LOTCHEM, LUCK etc will benefit. Higher interest rate will improve NIMs of the banks with BAFL, BAHL, MCB and MEBL to be the major beneficiaries, in our view.