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Pakistan Economy: State Bank Increases Policy Rate by 50bps to 10.75% (In-line with expectations)

 

• The State Bank of Pakistan (SBP) in its Monetary Policy meeting held earlier today announced an increase of 50 basis points in its Policy Rate to 10.75% (almost 7-year high), taking cumulative increase since Jan 2018 to 475bps. This was in line with market expectations.
• In a poll of 23 respondents by Bloomberg, 10 expected a hike of 50bps, 7 expected 25bps, 5 expected 75bps while 1 expected no change.
• The above is a signal by the central bank that the macroeconomic situation of the country remains constrained. This increase is higher than the 25bps increase in previous monetary policy meeting in January 2019.
• Primary reasons for rate hike were 1) persisting inflationary pressures, 2) worsening fiscal situation and 3) continuing external account pressures. Moreover, SBP now expects real GDP growth rate at 3.5% vs. 5.2% in FY18.
• SBP expects Current Account Deficit (CAD) for FY19 to be in the range of US$13-14bn while foreign exchange reserves currently are US$10.7bn. To note, we have received US$2.1bn earlier during  the week from China (total of US$9bn since the start of the newly elected govt. in July 2018).
• The above hike in interest rate comes just after this week’s visit of the new country chief of the International Monetary Fund (IMF) and increasing news regarding upcoming IMF program. As per today’s news reports, Finance Minister Asad Umar said that Pakistan is likely to secure a bailout package from the IMF of between US$6bn and US$12bn by the middle of May 2019.