The State Bank of Pakistan (SBP) may keep the policy rate unchanged in monetary policy decision on Saturday for the next two months.
“While current low inflation suggests some room is available for monetary easing, but status quo will be maintained this time as the inflation reading is now on upward trajectory while there are fears of trade deficit accumulation,” Zeeshan Afzal, analyst at Insight Securities Expects said.
Pakistan Consumer Price index (CPI) is set rebound in the ongoing fiscal year as the benefits of low commodity and food prices are fizzling out.
The analyst expects the CPI will be about 3.8 per cent in July 2016, up from 3.2 per cent in June 2016 and 1.8 per cent in July 2015.
CPI is likely to rise to 5 per cent by the end of 2016 owing to ending base effect. Full fiscal year (2016-17) average CPI is estimated at 5 per cent. Analysts assume moderate recovery in fuel prices but inflation could rise above estimate if commodity prices increase unexpectedly.
On the other hand, Current Account balance could also worsen due to lower exports and likely imports for development projects. But the impact of higher imports will be partially neutralised as most of the imports under the China Pakistan Economic Corridor (CPEC) projects will be partly financed by Chinese investment and lending.
For upcoming monetary policy, analysts expect status quo where the board will like to see the impact of the recent 25bps easing, the inflation trend etc.
Going forward, there is hope of a 50bps rise in policy rate as rising inflation, possible trade deficit and currency pressures could build the case for higher interest rates in early 2017.
In the region and comparable countries, central banks have adjusted their key policy rates by –25bps to +50bps during 2016, apart from Egypt (1%), Philippines (-1%) and Nigeria (+2%).
During 2016, the Pakistani Rupee has remained fairly stable compared to 1.2 per cent and 0.4 per cent depreciation of Indian and Sri Lankan rupee, respectively, against the US Dollar. On the other hand, Bangladeshi Taka, Indonesian Rupee and Thai Baht has appreciated by 0.3 per cent, 5.1 per cent and 3.2 per cent respectively.
Economic slowdown, depreciated European currencies and appreciated US Dollar and Japanese Yen could result in lower Pakistani exports to Europe and increased import bill, hence worsening Current Account Balance and pressures on Pakistani Rupee, forcing SBP to reduce interest rates.
As per the indications given by the SPI numbers released by Pakistan Bureau of Statistics, Consumer Price Index is estimated to surge by 3.8 per cent in July 2016 compared to 3.2 per cent last month.
On month on month basis, analysts expect CPI index to climb by 1 per cent due to surge in food prices and quarterly review in House Rent Index. On the other hand, stable petrol and HSD prices and normalised inflation in other groups will provide some support.
Food inflation (34.8 per cent weight in the CPI) is likely to surge by 1.1 per cent MoM explained by the likely 6.2 per cent higher perishable food prices (4.99 per cent weight). Non-perishable food prices (29.8 per cent weight) may witness a slight increase of 0.3 per cent MoM.
As per SPI numbers, the prices of potatoes and tomatoes have jumped up by 39.7 per cent and 11.9 per cent respectively. Apart from that, eggs and wheat flour prices have increased by 8.6 per cent and 0.6 per cent respectively.