SBP pushes monetary policy meeting due to “unexpected events”

SBP pushes monetary policy meeting due to “unexpected events.” The State Bank of Pakistan (SBP) has convened an emergency meeting of its Monetary Policy Committee (MPC) to discuss “recent unanticipated occurrences” that have altered inflation and balance-of-payments forecasts.

In a brief press release on Tuesday, the central bank announced that the MPC meeting will now take place on Friday (Nov 19), rather than the originally announced date of Nov 26.

The revelation quickly drew bankers and analysts’ attention as discussion about a new interest rate spread in the financial market began.

“The meeting has been moved up because of recent unexpected developments that have impacted the outlook for inflation and the balance of payments, as well as to help alleviate market concern about existing monetary policy settings,” the SBP stated.

The SBP is implementing various policies to contain the damage caused by rising inflation and a ballooning current account deficit.

The SBP had previously said that the current account deficit would be between 2% and 3% of GDP, but the first quarter deficit exceeded the yearly objective, reaching 4.1pc of GDP. Similarly, the increased volume and cost of imports inflated the local market, with prices exceeding economic managers’ expectations.

Simultaneously, the US dollar’s strong increase against the rupee destroyed the SBP’s exchange rate regime, which was designed to maximize the benefits of a free-float exchange rate without influencing the currency market.

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The SBP increased the cash margin on hundreds of imported commodities to 100% in order to minimise the import cost and alleviate pressure on dollar demand. This did not, however, succeed.

The central bank has upped the Cash Reserve Requirement (CRR) to 6 percentage points from 5 percentage points. It was intended to constrain the supply of cash, so lowering imports and compelling banks to increase deposits and sell dollar holdings.

“The MPC will assess these developments and make monetary policy decisions in light of them,” the SBP stated.

What matters more to the financial markets and other economic stakeholders is the interest rate, which is much lower than inflation. The majority of bankers and analysts feel that the moment has arrived to raise interest rates, which were dramatically cut by 6.25 percentage points to 7pc in the first half of 2020 due to the Covid-19 pandemic. After a year of maintaining the interest rate at 7pc, the SBP hiked it by 25 basis points to 7.25pc in its recent monetary policy.

“I believe the State Bank wishes to eliminate interest rate uncertainty,” Samiullah Tariq, head of research at Pak-Kuwait Investment Company, said, adding that this would be beneficial to the market.

“The SBP is attempting to minimise ambiguity, which means that there is much speculation about an increase in interest rates as a result of the International Monetary Fund (IMF) program,” said Mohammad Suhail, CEO of Topline Securities. “It appears as though they [the SBP] want to dispel this rumor and also send a signal to the IMF. It could be a preceding action, similar to the one-percent CRR hike,” he remarked.

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