Market predicts 100-150bps interest rate hike

Karachi: The financial market anticipates that the State Bank of Pakistan (SBP) will announce a 100 to 150 basis point hike in the interest rate in its next scheduled monetary policy.

The central bank said on Tuesday that its Monetary Policy Committee (MPC) will convene on Thursday and that Acting Governor SBP Dr. Murtaza Syed will release the policy statement for the next two months at a news conference.

Analysts predict that interest rates will rise mainly due to the rising inflation trend, which increased by more than 21% in June.

Samiullah Tariq, head of research at Pak Kuwait Development and Investment Company, believes the interest rate could be increased by 100 to 150 basis points in the following monetary policy if inflation forecasts for the upcoming fiscal year (FY23) are accurate.

The policy interest rate is currently 13.75 percent, whereas inflation for FY22 was 12.2 percent; the actual interest rate was nevertheless positive. However, if inflation persists at 18 to 19 percent, the interest rate could fall below the inflation rate, resulting in a negative real interest rate.

Finance experts feel that an increase in interest rates to 18 to 19 percent (as a result of predicted inflation of up to 19 percent in FY23) will severely hinder economic growth. The increased interest rates result in a greater risk of default, which causes banks to limit funding or request a further increase in interest rates to compensate for the risk.

Finance Minister Miftah Ismail has previously predicted that the upcoming fiscal year will be marked by much greater inflation due to rising oil prices and a super cycle in commodity prices.

According to a survey by Topline Securities, 80% of respondents anticipate an increase in the policy rate in the future monetary policy. In addition, 45 percent of participants predict that the policy rate will increase by 100 basis points; 30 percent anticipate an increase of 150 basis points, and 5 percent foresee an increase of more than 150 basis points.

Regarding inflation projections, 52 percent of respondents expected inflation to exceed 17 percent in FY23.

11 percent of those polled anticipate a rate between 16 and 17 percent, while the remainder anticipates a rate below 17 percent.

According to the research report, the SBP raised policy rates by 400 basis points in 2022. “The results are also consistent with our projections, as we anticipate a further increase in policy rates in the future due to inflation and external account concerns,” the report states, adding that the SBP has already raised policy rates by 400 basis points in 2022.

In June 2022, annual CPI inflation hit 21% (plus 6% month-over-month), above market predictions of 18% to 20%.

This was owing to higher-than-anticipated inflation in the transport and food CPI categories, which came in at 62pc and 26pc year-over-year, respectively.