LAHORE - The State Bank is likely to tighten the upcoming monetary policy, as the government has agreed to increase discount rate by 150bps in response to the precondition of the new IMF loan programme, believing that inflation might revert back to double-digit in coming months. Financial experts are of the view that in 2008, the govt had increased discount rate by 200bps to meet IMF conditions. The govt again has fulfilled many of these pre-conditions including devaluation of rupee by 3% since July 2013. That is why markets are speculating on increase in interest rate.
They said that there are strong signs that the SBP will push the interest rates up, which could stall the economic activity, but provide breathing space for the declining banking spreads. Since July 2012 discount rate has declined by cumulatively 300 basis points to nine per cent. Sources said the IMF had asked the government to increase the discount rate by 100 to 150 basis points to 10-10.5%. In its last meeting, the SBP had slashed the discount rate by 50 basis points to 9% while arguing that inflation had been falling and economic growth was too anemic. Pakistan has been trying to convince the IMF to hold-up its monetary policy advice for a few months, but the lender has not agreed yet. The monetary policy will be one of the prior actions that will help determine the size of the bailout package.
Experts warned the government of increased risk of price pressure in the coming months. Therefore, the central bank is unlikely to go soft on inflation in August monetary policy statement, they added. Inflation spiked to 8.3 percent in July 2013 from a year ago, the highest since September 2012.
Loan repayments to the IMF, a new IMF loan with a condition to control inflation and depreciating value of Pak rupee against dollar signaled a hike in interest rate in the coming monetary policy. Financial market sources are of the view that Pakistan has been facing pressure from the International Monetary Fund to make loans expensive for the private sector by increasing the minimum interest rate to double digits.
The Washington-based lender’s push for interest rate hike is aimed at convincing Pakistan to adopt a contractionary monetary policy that the Fund believes is necessary for economic stabilization while independent economists say that it would cost the country economic growth and development.
Sudden rebound in inflation to 8.3% in July and massive government borrowings from the central bank can be used as a basis to increase the interest rates, making IMF’s case stronger to ask for the uptick. Sources say that the IMF had questioned Pakistan’s monetary easing (expansionary monetary policy), despite wider fiscal deficit and serious problems in financing the current account deficit, the sources added. However, some analysts do not agree with this assumption, saying the central bank will continue with its soft monetary stance to stimulate private spending and credit growth. The discount rate could be slashed by 50 basis points (bps) to 8.5 percent from the existing level of nine percent since SBP is unlikely to pay heed to growing inflation, they argued.
They said that incremental interest rate is always favourable for banks since it expands the net interest margin. The overall spreads showed a slight jump of 15bps to 6.34 percent in May 2013. With core margins to come under duress, banks are expected to shift their focus on generating income through other means such as non-fund income and booking of revaluation of surplus on securities as key variables, said the report.