KARACHI: Despite government’s claims that all prior conditions of the IMF have been met except foreign exchange reserves, the central bank is expected to raise the interest rates by up to 200 basis points in its next monetary policy meeting, analysts and financial sector experts said on Saturday.

The clear indication was given in the latest treasury bill auction, held on March 22, when the yields on the short-term government certificates rose to almost 22 per cent.

In the first week of March, the State Bank of Pakistan (SBP) increased the interest rate by 300 bps to 20pc. Days before that massive hike in the interest rate, the government had already increased the treasury bill rates to around 20pc.

“The fact that the Ministry of Finance has increased cut-off yields implies an increase in the policy rate. This signifies that the IMF deal is still alive and kicking,” said Faisal Mamsa, CEO of Tresmark, a local financial data portal.

The SBP’s next monetary policy meeting is scheduled for April 4.

In the latest treasury bill auction, cut-off yields on three-, six-, and 12-month certificates were increased by 100bps, 114bps and 50bps, respectively. Based on these cut-off yields, market participants expect interest rates to be increased by another 200bps.

Analysts in the financial sector believe that a further hike in the interest rate could be a need for the government since inflation has gone out of control. The main inflation jumped to 31.5 per cent in February, reflecting that the measures taken by the State Bank and the government have failed to tame rising pace of price rises.

“I believe an increase of two percentage points in the interest rate is expected in the upcoming monetary policy,” said Samiullah Tariq, head of research at Pak-Kuwait Investment and Development Company.

March’s inflation reading was expected to be around 34pc, he said, adding: “So, the gap between the inflation and interest rates is too wide.”

It looks as if the government and the State Bank had only one tool to get control over inflation —increasing interest rates. No administrative measures are being taken to stop the markets’ insatiable greed for higher profitability.

The unchecked profit-making is also stoking inflation, particularly food inflation, which has risen to record levels. Hoarding, black marketing, creating artificial shortages and charging prices much higher than the actual rates have all made the prices of products and services rise quickly.

Sohail Ahmed, CEO of Topline Securities, also insisted that the treasury bill auction had already indicated an increase in the interest rate, and the next monetary policy could come up with a 100 to 200 bps hike.

However, Tahir Abbas, head of research at Arif Habib Ltd (AHL), said he was expecting the SBP to raise its policy rate by 100bps.

Inflation in the upcoming months is likely to remain elevated as the impact of external and fiscal adjustments (including additional taxation, tariff hikes, weakening of the currency and the ‘Ramazan factor’) unfolds, he said.

Moreover, core inflation continues to remain higher as inflationary pressures rise and broaden, reflecting the spillover effects of the rupee’s weakening amid ongoing debt repayments and lower financial inflows, he added.

According to an AHL survey, 30.8pc respondents expect a rate hike of 100bps, 26.9pc foresee an increase of 200bps, whereas 42.3pc see the policy rate to remain unchanged.

Published in Dawn, March 26th, 2023