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Pakistan Economy: State Bank Increases Policy Rate to 8.5%

• The State Bank of Pakistan (SBP) in its Monetary Policy meeting held on Saturday (Sept 29, 2018) announced a rise of 100 basis points in its Policy Rate to 8.5%, taking 2018YTD hike to 275bps. This was in line with our expectations where we expected interest rates to increase by 100 basis points.
• In a broker poll of 27 correspondents, 8 had forecasted 100 basis points increase, 2 had forecasted 75 basis points increase, 16 had forecasted 50 basis points increase and 1 had forecasted status quo in outgoing monetary policy decision. 
• We expect a further hike of 125 basis point increase in 2019 where we expect the policy rate to increase to 9.75% by 2019 due to 1) rising inflation on back of higher oil price, 2) increase in domestic gas prices and 3) continued external vulnerability.
• Regarding inflation, State Bank expects inflationary pressures to gather pace and is forecasting inflation range of 6.5%-7.5% for FY19 (revised upward by 50bps from last MPS) as compared to 3.9% for FY18.
• Moreover, SBP is expecting slow down in economy, where FY19 real GDP growth target is revised down to 5% from earlier 5.5%, this is broadly in line with our assumption of 4.7-4.8%.
• On Sector front, we expect debt financed sectors like  cements, fertilizer, steels, and textile to have negative impact on average 1-3% on their bottom-line.
• On the other hand, banks and cash rich companies likely to have positive impact of around 7% and 2% respectively.