The State Bank of Pakistan (SBP) is expected to raise the policy rate byanother 400 basis points from 16 percent to an all-time high of 20 percentby the end of the fiscal year 2022-23.
According to a report by JPMorgan Chase on emerging markets “EM Edge DataWatch”, Pakistan’s central bank will hike the policy rate to 20 percent bythe end of the ongoing fiscal year amid implicit inflationary pressures andthe bank’s greater emphasis on supporting growth in the aftermath of thefloods.
The SBP raised the policy rate by 100 bps to 16 percent in November,against JPM and consensus expectations for a hold, citing strong andpersistent inflationary pressures. This is an abrupt change from the dovishtone adopted since August when the central bank signaled a greater emphasison supporting growth in the aftermath of the floods.
To some extent, SBP’s rate hike could reflect implicit pressure from theIMF to stay on top of inflation ahead of the delayed 9th EFF review as wellas a pre-emptive move to guard against currency pressures ahead ofhigh-profile external debt servicing (e.g., US$1 billion Eurodollar bondpayment in December) even as reserves continue to fall, said the report.
The report suggests that if policy orthodoxy against inflation returns andstays, the SBP remains behind the curve based on its historical reactionfunction. It projects another 400 bps of hikes, bringing the policy rate to20 percent by the end of FY23.
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Remittance inflows have tapered off in recent months (averaged US$ 2.5billion in August-October 2022) after rising to an all-time high of US$ 3.1billion in April, though still at elevated levels compared to pre-pandemiclevels (average US$ 1.7 billion per month in 2015-19).
“We think a key reason is the slower pace of adoption of digital remittanceservices as borders reopen and international travel normalizes,” added JPMorgan.