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Inflation at 4.3% in Dec, 2014: Stakeholders expect a cut of 50-100 bps in SBP’s monetary policy on Jan 2015

Inflation at 4.3% in Dec, 2014: Stakeholders expect a cut of 50-100 bps in SBP’s monetary policy on Jan 2015

KARACHI: The stakeholders are pondering over the extent of ‘inevitable’ cut in the interest rate by the State Bank in its next monetary policy review.

The money market, industry, stock investors and banks are abuzz with speculations about the upcoming Monetary Policy Statement (MPS) to be unveiled on January 24. The rate-cut expectation is based on low inflation that has generated space for the policy makers to adopt a liberal monetary stance. Currently, the government is the biggest borrower of the banks which crowd out the private sectors from the credit market.

Depending on their positioning different sectors were projecting a possible size of cut in the discount rate. However, analysts were expecting a cut of 50 to 100 basis points (bps) in the interest rate.

So far the State Bank has not hinted about strategy but the past experiences show the central bank will adopt a conservative approach to avoid risk of disturbing inflation trend. The bank has been under psychological pressure of double digit high inflation for several years.  The CPI inflation at 4.3 per cent in December (the first six months average is 6.1pc) is the lowest so far in this fiscal year. Analysts believe this level provides basis for 50 bps cut. The industry is demanding over 200bps cut in the policy rate followed by stocks investors 100bps and the banks 50bps.

“An expected slippage on fiscal deficit target could also be one reason why SBP would opt for a cautious approach. Hence, we anticipate SBP to cut the policy by 50 basis points rate in upcoming monetary policy and go for a further cut of 50bps later on,” said research report of Topline Research

The report said the money market is anticipating a 100bps cut in upcoming MPS as yields on government securities have declined significantly by 124-280bps in fourth quarter of this calendar year. Currently, 2-years PIBs is trading at 9pc which is down by 280bps, whereas yields on 6 month t-bills declined by 124bps to 8.7pc in the fourth quarter. “Keeping in view the stumpy inflation, better balance of payments situation, higher foreign exchange reserves and declining cut-off yields on government securities, the discount rate (DR) cut is inevitable. Although cushion allows even a 100bps cut but we anticipate only 50bps considering the IMF factor and more cautious approach of declining DR gradually,” said a report of InvestCapital.

Faisal Mamsa of Landmark Capital said; “We expect SBP to cut interest rates by fifty basis points. The Central Bank will opt to take a balanced approach by looking not only on the decline in inflation, but also on the inflation trajectory, that is, how long does inflation stay low. We have had some fortunate developments in global markets and have benefitted by decline in oil prices and base effect in commodity prices.”

“Real interest rates have been on the rise, so its only logical for the Central Bank to cut interest rates. However, we expect SBP to be more cautious in its outlook and may review other macro economic developments, especially the current account deficit, before easing further,” said Eman Khan of Aerari, an application that tracks market rates.