KARACHI: The State Bank of Pakistan (SBP) is likely to keep its policy rate on hold this week to continue to support an economy that is struggling with soaring coronavirus cases, and is wary of increasing inflationary pressures, analysts predicted on Tuesday.

The central bank kept interest rates unchanged at 7 percent for the third straight meeting in January after cutting them five times last year by a total of 625 basis points (bps).

The SBP Monetary Policy Committee (MPC) will meet to review interest rates on March 19 (Friday).

The majority of analysts surveyed view policy rates to remain stable in their upcoming meetings given the forward guidance provided by the MPC on monetary policy. The policymakers, in the last statement, clearly indicated to hold rates in the near term until there are clear signs that the economy is recovering.

“As the recovery becomes more resilient and the economy returns to full capacity, the MPC expects any adjustments in the policy rate to be measured and gradual to achieve somewhat positive real interest rates,” the SBP said in its January monetary policy statement.

However, the recent rise in T-bills and bond yields suggests investors are starting to anticipate monetary policy tightening sooner than anticipated to accommodate a potential spike in inflation.

Based on data on secondary market yields, the average yield has increased by 19 bps for short-term T-bills and 23 bps for long-term bonds.

The main cut yields for fixed-rate T-Bills and Pakistan Investment Bonds were up 51 bps and 131 bps, respectively.

Analysts agree that the supportive stance of the central bank is unlikely to remain in effect since May.

“After coaching, we hope there will be no change in rates through the T-bill and KIBOR [Karachi Interbank Offered Rate] published. Going forward because of the IMF [International Monetary Fund] conditions and rising commodity prices interest rates in Pakistan will gradually rise, “said Mohammed Sohail, CEO of Topline Securities.

The IMF and Pakistan reached a staff-level agreement on reforms that would allow an estimated $ 500 million to be disbursed. The IMF executive board is expected to approve a pending review of IMF-backed reforms later this month or possibly early next month.

International financial institutions such as the IMF and World Bank predict Pakistan’s economy will expand 0.5 percent to 1.5 percent in the current fiscal year. The SBP projects economic growth of 1.5-2.5 percent for this fiscal year. “I don’t expect any changes in the policy level. SBP must balance the risk of rising inflation with Covid and keep the economy going, “said Samiullah Tariq, head of research at Pak-Kuwait Investment Company.

Faizan Ahmed, head of research at BMA Capital, said the SBP was very clear in the forward guidance provided at the last MPC, so the rate is likely to remain intact at 7.0 percent in the MPC this month.

“However, rising inflation is indeed a challenge, but it is important to see how the SBP assesses the nature of the recent commodity boom and the risk of a more rapid increase in NFNE (non-food, non-energy) in the current environment.

He said the new round of lockdowns related to Covid was adding to the complications as NFNE had so far remained benign during the lockdown period.

Depending on commodity prices, inflation in FY2021 could exceed 9.0 percent year-on-year, above the upper level of the SBP inflation range of 7-9 percent, he said.

“The question is not whether SBP will raise interest rates or not because monetary adjustments are inevitable to return real interest rates to positive territory. The more relevant question is when did interest rates start to rise? “Said Ahmed.

“Looking at current data, the first rate hike may be in May 2021 and I expect the hike to be gradual as confirmed by the SBP in its last MPC,” he said and added, “So, a 50 bps hike in May was followed by a 50 bps increase in each. Successive MPC through December looks likely ”.

“This adds to the 200 bps cumulative increase in 2021 and will raise the policy rate to 9.0 percent, translating into a real rate of 1.5-0.5 percent based on the FY2022 inflation projection of 7.5-8.5 percent,” said Ahmed.

In a client note, Taurus Securities expects no change in the benchmark interest rate hike of 25 bps, based on inflationary pressures and the resumption of the IMF program.

The National Consumer Price Index for February was posted at 8.70% YoY and is expected to hover above 9% for March as well, according to recent forecasts.