By: Yawar Uz Zaman, Shajar Capital Pakistan Private Limited.
State Bank of Pakistan (SBP) is scheduled to announce its Monetary Policy Statement (MPS) tomorrow (Sep 12, 2015). With ample room available for a rate cut, we foresee SBP to reduce Policy rate to 6% from 6.5%. Consequently, discount rate is likely to be slashed with the same breadth (-50 bps).
Decline in Arablite Crude oil price ~-21% FY16TD, ample FX reserves (US$18.59bn), with soft inflation readings expected in 2QFY16 (average 2-3%), there is a high probability of re-adjustment in policy rate by – 50bps.
Similarly, Yields in recent PIB auction also decline by on average 16.3bps, suggesting market stance over a possible rate cut. On a conservative note, average CPI in 1HFY16 is projected to stand at 2.5% vs. policy rate of 6.5%, implying a huge real interest spread of 400bps.
To recall, in the previous MPS, SBP highlighted the room for a rate cut but remained cautious over the post flood impact on local commodity prices. However, lower CPI for August (1.7%YoY) and limited risk over any uptick in CPI till 1HFY16 (~average 2.5%), SBP would have limited reason for justifying a ‘Staus Quo’ this time around.
Despite currency depreciation (2% in QTD), PKR adjustement against US$ is much lower than India & China (see table on left). We expect PkR to witness further 2-3% depreciation in near term.