The State Bank of Pakistan (SBP) is scheduled to meet on Monday (January 24) to assess developments on the economic front and announce its monetary policy.

Conflicting movements in economic indicators suggest the worst is not yet over, but the market has developed consensus that the policy rate will remain unchanged at 9.75% for the next two months.

The likely no change in the rate does not mean the current cycle of rate hike has come to an end, but most of the experts say there is still room for another hike of 50-100 basis points (bps) in the second half (Jan-Jun) of fiscal year 2021-22.

“The central bank will maintain the status quo on Monday, but is highly expected to again consider increasing the rate in March 2022 and later,” BMA Capital Executive Director Saad Hashmey said while talking to The Express Tribune.

The benchmark interest rate is a tool with the central bank to create balance between inflation reading and economic growth.

The central bank has increased the key policy rate by a cumulative 275 basis points from September to December 2021 to 9.75% to control the rising inflation and narrow the widening current account deficit, while economic activities remain healthy.

“However, the inflation reading and current account deficit have increased while foreign exchange reserves have gone down despite the central bank’s recent measures to control them,” said Ismail Iqbal Securities Head of Research Fahad Rauf.

A wide gap of around 150 basis points between the key policy rate and benchmark bank lending rate Kibor (Karachi Inter-bank Offered Rate), instead of the usual gap of 50bps, also suggests that the financial market anticipates a hike of 100 basis points in the policy rate.

Besides, the fifth wave of Covid-19 (Omicron) is spreading fast and posing a threat to the economy.

A question arises if economic indicators and the pandemic continue to worsen despite the recent policy rate hikes and other measures, then why the central bank is likely to take a pause instead of increasing the rate on Monday.

There are a couple of answers to the question. One is that the central bank has indicated in its monetary policy statement’s (MPS) forward guidance that it will hold the key interest rate steady in January.

Similarly, the central bank’s high officials reiterated in the domestic and international media that they would leave the rate unchanged in the medium run and wait for responses to the measures taken so far.

So, the central bank and its officials will keep their word, as if they increase the rate in response to an evolving situation, then it will be perceived as hurting the bank’s credibility.

“The central bank is most likely to keep the rate at current level and strengthen its credibility,” Rauf said.

The second answer to the question is that the central bank will adopt a wait-and-see strategy on Monday, meaning it will wait for the responses to come in the backdrop of actions taken so far.

In the recent past, the central bank has increased the benchmark interest rate by 275 basis points and the government has increased the rate of taxes and duties on imports through the mini-budget.

“The measures taken by the central bank and the government are anticipated to start delivering results from Feb-Mar onwards,” said KASB Securities Head of Research Yousuf Rahman.

The inflation reading and current account deficit are expected to start declining from Feb-Mar 2022, which is the primary objective of the recent hike in the benchmark interest rate.

“If the responses remain favourable then the central bank might hold the rate there for several months and start cutting later on,” he said.

Moreover, the Omicron variant is spreading fast and infection ratio is high. “However, the new strain is not as deadly as previous variants were. It is less dangerous and the ratio of recovery is comparatively high,” he said.

Moreover, the government has decided not to lockdown the economy this time and is asking people instead to better adopt SOPs (standard operating procedures) to remain safe.

“The central bank has achieved its targets … including achieving a mildly positive benchmark interest rate. This and the previous forward guidance suggest status quo in the next (Monday) monetary policy,” Arif Habib Limited Head of Research Tahir Abbas said.

There are chances that the bank would increase the rate by 25-50 basis points in March and later. “It is expected that the bank will consider reducing the rate from September,” he said.


Published in The Express Tribune, January 23rd, 2022.

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