SBP may keep interest rate unchanged: Fitch report

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KARACHI: State Bank of Pakistan (SBP) is likely to keep the interest rate unchanged at the remaining part of the fiscal year because of decline in oil price which helped tame the inflationary pressure helping trimming in prices of several commodities however rise in expenditures to widen fiscal deficit, said Fitch Solutions.

Fitch Solutions an arm of Fitch Ratings but an independent research house expects that the State Bank of Pakistan to keep benchmark interest remain on hold for the remainder of FY2018/19 (July-June) after hiking by a cumulative 425bps to 10.00 percent in 2018.

Inflation is likely to stabilize at around 6 percent, helped by the decline in oil prices and higher interest rates.

The SBP will likely be mindful of a further tightening in the near-term as the upcoming IMF bailout would typically result in fiscal tightening and exert downside pressure on the economy.

The SBP surprised the market by hiking its target policy rate by 150bps to 10.00% on November 30, 2018, bringing the total amount of rate hikes for 2018 to 425bps. The upside pressure on nominal rates has come despite a drop in headline consumer price inflation (CPI), which has declined for two consecutive months, coming in at 6.2 percent on year on year basis in December.

This puts the real interest rate firmly in positive territory and suggests that the SBP is taking a pre-emptive stance on preventing an inflation spiral.

“With price pressures likely to remain stable over the coming months due to the decline in oil prices and the pre-emptive hikes, which will help offset the second round effects of PKR depreciation, we believe that the SBP is now ahead of the curve and will likely remain on hold for the remainder of FY2018/19 as it balances the need to support economic activity and maintain price stability”, the Fitch Solutions said in a report.

Moreover Fitch Solutions has revised its forecast for fiscal deficit and it will touch 6.0% in FY2018/19, from 5.8% previously.

Although the government will likely have to cut its spending over the coming months, we believe that there will be limited room for policymakers to cut either current or development expenditure.

Meanwhile, revenue growth is likely to be dragged down by the poor economic growth outlook.

“The government will likely have to cut back on its expenditure over the coming months as it looks to secure funding from the IMF under the bailout program amid weak revenue growth.

The widening current account deficit, weakening currency, and dwindling foreign reserves suggest that the current fiscal trend (where expenditure continues to outpace revenue growth) is unsustainable.

Pakistan saw its budget deficit as a share of GDP balloon from 4.6% in FY2015/16 to 6.6% in FY2017/18 as expenditure grew by an average of 13.7% per annum, outpacing revenue growth at 8.5%. This trend continued into Q1FY2018/19 (July-September) when expenditure surged by 12.1% y-o-y, while revenue grew by 7.5% y-o-y in the same period. This saw the budget shortfall widened by 22.9 percent on year on year basis to Rs 541.7 billion in the three-month period, from Rs 440.8 billion a year ago. – NNI