Showing posts with label demand to reduce interest rate. Show all posts
Showing posts with label demand to reduce interest rate. Show all posts

Monday 23 May 2016

Pakistan reduces interest rate by 25 basis points

On 21st May 2016 State Bank of Pakistan (SBP) issued Monetary Policy Statement for next two months. It has attracted mixed reaction, some term it too little and too late, while many term it a surprising move. However, a few term it an anticipated move and the evidence was rejection of all the bids received in the recent auction of Pakistan Investment Bonds (PIBs).
Many of the financial sector experts were under the impression that in May the SBP would increase the policy rate. This mindset was evident in PIB auction and SBP stance demonstrated though rejection of all the bids. However, one completely fails to understand the logic behind 25 basis point reduction. If the PML-N government is serious in boosting GDP growth rate, it has to reduce the policy rate minimum by 100 basis points.     
It is pertinent to note that SBP last cut the rates by 50bps in September 2015 and since then it has been maintaining status quo in subsequent announcement. SBP forecasts headline inflation (CPI) to remain within targets for the CY16 and going into CY17 to gain upward momentum. However, missed GDP growth target of 5.5% remained major concern and rate cut is expected to help spur growth.
Even though the inflation has been on the rise for past 7 months, SBP expected the outlook to remain low for CY16. However, with rising oil and commodities prices and expected imposition of certain tax measures by the Government in upcoming budget the SBP forecast the inflation to gain upward momentum in CY17. 
Large Scale manufacturing (LSM), mainly supported by construction and consumer durables, automobiles, fertilizers, and cement production, grew 4.7% in the July-March CY16 compared to 2.8% a year ago. The growth is expected to gain further on the back of improved electricity and security situation, according to SBP.
SBP also noted stability in balance of payments and upward trajectory in foreign exchange reserves on account of healthy workers’ remittances and lower international oil prices to keep the situation within manageable levels. Furthermore, SBP remained optimistic on external front, likely on account of continued workers’ remittances and bilateral inflows owing to various projects under CPEC.
Equity markets in general would perceive 25bps cut optimistic as it inflates the valuation especially for highly leveraged companies and sectors. Analysts maintain their likeness for cement, fertilizer, textile and other manufacturing base sectors which would remain in limelight going forward. Margins for banking sector are likely to shrink further thus putting banks under pressure. However, their profitability is likely to remain intact due to revaluation gains in PIB's portfolio.

Some market analysts see room for further reduction of rates, to spur growth. However, many expect SBP to keep rates on hold in near future, owing to rising inflation. A marginal upward move in inflation figures in upcoming months would be in line with SBP estimates. However if those numbers inflate somehow, SBP will have to revisit its rates policy sooner than later.