By: Spectrum Securities Limited
MPS: State Bank of Pakistan is scheduled to announce its next two months monetary policy on Saturday, November 21, 2015. In the current economic scenario we foresee status quo in Target Rate as a plausible option for the Central Bank. In this report we present our view on upcoming Monetary Policy.
Inflation outlook to keep Target Rate onhold: Despite Pakistan’s elongating Foreign Exchange reserves, lower import bill owing to falling crude oil prices, and soft inflation numbers (4MFY16 Avg. CPI 1.65%) in reported recently, we foresee central bank to maintain discount rate in upcoming policy announcement. Moreover, from last monetary policy to date average PIB Yields fell by 0.29%, where 3-years, 5-years, and 10-years PIBs yields went down by 0.33%, 0.34% and 0.19% respectively but expected higher pace of inflation from Dec’15 and fear of dollarization would restrict the Central Bank. Since, real interest rates are still at higher levels of 4.35% in Oct’15 as compared to last 2- year average RIR of 2.68%, therefore the gap between historical averages and current RIR would narrow down in case of slash in discount rate that would allow investors seeking higher returns to withdraw their investments thus depreciating exerting pressure on local currency.
During FYTD, PKR depreciated 3.6% and we expect PKR to witness further depreciation (ranging between 2.5% – 3%), however BOP position would strengthen as a result of Dollar influx from IMF ($502mn), ADB ($400mn), and higher remittances (up5.2%YoY). We expect State Bank of Pakistan (SBP) to keep Target rate by at 6%, thereby maintaining Repo Rate at 6.5%.