The State Bank of Pakistan (SBP) may increase the policy rate by 125 basis points in its Monetary Policy Committee (MPC) meeting, scheduled for December 14, to bring it back to the double-digit.
KASB Research predicted this in its report on Friday, saying the analysis is based on the SBP’s forward guidance and the macro-imbalances depicted in the recent economic data.
It said cracks have been emerging in the macroeconomic landscape over the last few months, as concerns over external and fiscal imbalances have been brewing since the structural shift from economic stabilisation towards growth.
The central bank highlighted issues in its September 2021 monetary policy statement and opted for cooling down the ‘overheating’ economy, saying, “Without timely monetary and fiscal intervention, we believe Pakistan was on the fast track towards recreating another boom-bust cycle.”
The report said that trade imbalances are hovering at record levels during the last few months because of rising economic activity, amid the commodity up-cycle. The latest trade figures highlight that Pakistan’s imports surged to an all-time high of $7.75 billion in November 2021. Despite record high exports, the trade balance more than doubled to $4.85 billion during the month. “In turn, our preliminary estimates suggest that the current account deficit would comfortably cross the $2 billion-mark in November 2021.”
The Consumer Price Index-based inflation surged to a 20-month high level of 11.5 percent in November 2021 because of elevated food and commodity prices. Electricity tariffs were hiked and domestic oil prices reached record high levels to comply with the International Monetary Fund (IMF) programme. “Its second-round effects are expected to materialise in the coming months, during which we project the CPI to comfortably hover in the double-digits,” said the report.
For the FY 2021-22, the report estimates that CPI inflation will average at 11.2 percent, well above the SBP’s projected range of seven percent to nine percent. Global central banks, including the SBP, have revised their assessment over the transitory nature of recent inflation. Initially, the State Bank depicted comfort over negative real interest rates, as it was prioritising recovery and felt that the inflationary uptrend would be short-lived.