SBP maintains discount rate at 10% in this year’s last MPS

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    • The State Bank of Pakistan (SBP) kept the Discount Rate unchanged at 10.0% in its May 17, 2014 Monetary Policy Statement (MPS), inline with our expectation.
    • SBP appreciated improving macro economic indicators, however remained concerned over (1) rising trade deficit balance and (2) appreciating Real Effective Exchange Rate (REER).
    • We believe (1) last week’s word of caution by IMF on recent up-tick in inflation and (2) possible imposition/increase in taxes in the upcoming Federal Budget FY15 may have influenced SBP into adopting a wait and watch approach.
    • We believe KSE is unlikely to show a major knee jerk reaction to SBP’s decision (40% participants eyeing cut in discount rate by 50-100bp), taking comfort from 8% inflation target set by the SBP for FY15F, where we expect SBP to ease discount rate by 50-100bp.

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    SBP appreciated macro recovery but remains cautious

    The State Bank of Pakistan (SBP) in its Monetary Policy Statement on May 17, 2014, similar to last MPS, appreciated improving macro economic indicators flagging (1) single digit inflation in YTD FY14 at 8.7% (however higher than revised FY14E target of 8%), (2) GDP growth provisional estimates of 4.1%, (3) betterthan- expected foreign inflows elevating foreign exchange reserves over US$12bn (SBP’s reserves to US$8bn) and (4) fiscal deficit of 3.1% of GDP in 9MFY14. However, SBP remained concerned over the elevated trade account deficit of US$12.2bn in 9MFY14 and (2) impact of appreciating Real Effective Exchange

    Rate (REER) on the trade balance. Hence, with a view to nurture improving macro economic indicators, SBP prudently kept discount rate unchanged at 10.0% in its last FY14 MPS, where FY14 saw a cumulative hike of 100bp in discount rate (50bp apiece in September and November 2013).

     

    SBP adopting wait and watch approach

    Though much of the macro economic indicators pointed towards a possible cut in the discount rate, we believe (1) a word of caution by IMF last week to adopt a more vigilant monetary policy to check recent up-tick in inflation and (2) possible imposition/increase in taxes in the upcoming budget FY15 may have tilted SBP’s decision into keeping discount rate unchanged at 10.0%. Moreover, we believe a nominal cut in policy rate (50-100bp) is unlikely to have major impact on private sector credit off-take, especially as govt. continues to crowd out credit off-take.

     

    Market to look ahead into an easing FY15

    We believe the equity market is unlikely to show a major knee jerk reaction to SBP’s decision, though some participants (40%) were expecting a 50-100bp cut in the discount rate (JS expectation of no change). We believe the market is likely to take some comfort from the 8% inflation target set by SBP for FY15F, where we expect SBP to ease discount rate by 50-100bp.

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