Inflation Bites, Brokerage Houses Predict 150bps Hike

(CTN News) – The State Bank of Pakistan (SBP) will raise its key policy rate by 150 basis points (bps) on September 14 to curb runaway inflation.

Arif Habib Limited (AHL), according to a report released on Thursday, believes that the SBP will raise the key policy rate by 150 basis points in the next few months, taking it from 22.5% to 23.5%. In fact, the key policy rate was already at a record high of 22% at the time of this report.

“Our view is that the SBP may consider raising interest rates as a precautionary measure to address persistently high inflation levels in the country in order to address persistently high inflation levels in the country,” said AHL, in a statement.

According to the brokerage company, inflation remained alarmingly high during 2MFY24, averaging around 27.8% on a month-to-month basis.

“ We expect this ongoing inflationary trend to persist, with our forecasts indicating an average inflation rate of 28.5% through December 2023, particularly following a peak in September 2023,” the report stated.

Several significant factors have contributed to sustained inflationary pressure, including: 1) the depreciation of the Pakistani rupee against the US dollar, 2) the rise in global oil prices, including Arab Light (up 5.2% since last MPS), and 3) high food prices.

As well as these factors, there is also the prospect of a substantial rise in gas tariffs of between 40 and 45 percent, which can further aggravate inflationary pressures, according to AHL.

A policy rate of 22% was maintained by the SBP in July.

At that time, the MPC acknowledged a reduction in economic uncertainty since the last meeting, as well as a successful resolution of external sector challenges in the near-term, which helped to boost investor confidence.

There were, however, some emerging upside inflation risks highlighted by the report.

Pakistan remains engulfed in a crisis of high prices despite a series of interest rate hikes. The key interest rate stood at 16% at the beginning of 2023.

There has been a persistent decline in the rupee, a high taxation rate, and an increase in energy and petroleum tariffs which are all taking their toll on the purchasing power of the average Indian.

According to AHL, the current economic climate in Pakistan is characterized by a growing current account deficit as a result of a change in the country’s import policy.

There has been a significant jump in imports due to this shift, with a 30% MoM increase seen just in the week of July 23 alone.

Additionally, the depreciation of the PKR against the USD has been substantial since MPS’s announcement on July 23rd. This is expected to intensify the inflationary pressures further in the coming months.”

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