More but not much in the offing: pundits
KARACHI: Majority of analysts expect the State Bank to cut interest rates by 50 basis points (BPS) to 9.5 per cent, the third cut in 2012-13 fiscal, when it meets next month to unveil its monetary policy as inflation is expected to average in single digit for the current year.
The possible cut is also expected to be the last cut as analysts forecast inflation to pick up from December due to the fading out of the base effect and also because of increasing risks to the external sector.
The central bank has made an aggressive cut of 200BPS to 10 per cent since July in order to boost economic growth.
Eight of the 10 analysts polled expected the Bank to trim the discount rate by 50 basis points amid easing inflation and to encourage economic growth.
CPI inflation decelerated to a 34-month low in October to 7.7 per cent year-on-year, and analysts expect inflation to clock in between 8 and 8.5 per cent for November, which, according to the analysts, gives SBP some space to continue with monetary easing.
But analysts say this with caution as they expect this will be the last cut for the remainder of the fiscal year as pressure on the rupee and depleting foreign exchange reserves are fast becoming a grave concern.
“The reasons for the cut are low inflation rate, which is expected to remain in single digit for the remainder of the fiscal, barring a sharp surge in crude oil prices, and marginal private sector credit growth since the beginning of the year, thus signifying absence of domestic investment spending,” said Khalid Iqbal Siddiqui, Head of Research and Economic Analysis at United Bank Ltd.
Inflation which has averaged in double digits over the past five years is expected to average in single digit in 2012-13, and perhaps even below the government’s target of 9.5 per cent.
But two analysts expect the State Bank to leave its key policy rate unchanged at 10 per cent. “The rupee outlook leaves little space for SBP to further cut the rates,” said Sayem Ali, economist at Standard Chartered Bank.
The rupee’s pace of depreciation against the dollar appreciated this week, hitting a record low of 96.75 by the middle of the last week, creating an almost panic-like situation in the interbank market.
Foreign exchanges reserves stood at $13.57 billion with State Bank’s reserves at $8.86 billion, including the repayment
to IMF of $394.3 million. The State Bank’s reserves only covers a little under three months of import cover, which is a real cause for concern.
Pakistan also has to pay back $6.3 billion to the IMF from Feb 2013 to 2015 and with no foreign aid in sight; some analysts believe Pakistan may head into another balance of payment crisis in the medium term and would be forced to turn to the IMF once again.
But a cut in the interest rates would mean that the government’s debt servicing costs would decrease, as it is the biggest borrower. And if it remains the banks’ biggest borrower, the banks would have no treason to feel excited about lending to the private sector. There are also structural issues, such as energy shortages and fiscal imbalances mainly due to the government’s huge borrowings from the banking sector, and analysts said that without fixing them first, investment and economic growth won’t pick up. In fact, a cut could be counter-effective.
MONETARY POLICY EXPECTATIONS
RespondentCitibankNo CutStandard Chartered BankNo CutHabib Bank Ltd50 bps cutMacroeconomic Insights50 bps cutTaurus Securities 50 bps cutSilk Bank50 bps cutUnited Bank Ltd50 bps cutAKD Securities50 bps cutTopline Securities50 bps cutArif Habib Ltd50-100 bps cut.