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Fitch Solutions sees no more rate hike in 2019

Business

May 23, 2019

KARACHI: Fitch Solutions has forecast no more interest rate hike in Pakistan during the year as it sees downward inflationary pressure after a recent hefty increase in the policy rate by the central bank that would put a floor under the tumbling rupee.

The research arm of Fitch Ratings in a report said the 150 basis point interest rate hike would support stabilisation in inflation over the coming months.

“In particular, the interest rate hike has brought the real interest rate firmly into positive territory of around 3.5 percent, which should help to stabilise the rupee and hence prices of imported goods,” it said.

“Given our expectation for inflation to stabilise, we at Fitch Solutions forecast the SBP (State Bank of Pakistan) to maintain its benchmark interest rate at 12.25 percent throughout 2019.”

The SBP earlier this week announced a 150 basis points increase in its benchmark interest rate to 12.25 percent following a 5.7 percent devaluation of the rupee to around Rs148/dollar on May 17, from around Rs140/dollar previously.

Fitch Solutions said higher interest rates and a more stable currency would ease consumer price inflation, which has already started to fall slightly to 8.8 percent year-on-year in April from 9.4 percent year-on-year in March.

“…we believe that the recent hikes will be able to counter the inflationary pressure resulting from rising oil prices,” it said. “Accordingly, we forecast inflation to stabilise to an average of seven percent in FY2019/20 (July-June), slightly higher than SBP’s target of six percent for FY2018/19, but considerably lower from the 8.8 percent y-o-y (year-on-year) recorded in April.”

The Fitch research arm, however, forecast corrosive impact of the rate hike on economic as well as credit growth.

“Given the aggressive hike in interest rates, we believe that Pakistan’s growth is set to slow over the near term,” it said. “In addition to the likely fiscal consolidation measures agreed as part of the IMF (International Monetary Fund) EFF (extended fund facility) deal, the 150 bps interest rate hike will discourage investment as well as consumer spending.”

Fitch Solutions would announce revised-down growth figure in the coming weeks. Previously, it forecasted real GDP growth to slow to 4.4 percent in FY2019 from 5.4 percent in FY2018.

Pakistan and the IMF reached a staff-level agreement on a 39-month extended fund facility package of around $6 billion on May 12.

Fitch Solutions said the combination of rising interest rates and slowing economic growth would also discourage the private sector’s borrowing, “which should also help curb inflationary pressures”.

“We believe that inflationary pressures will ease as credit growth in both private and public sectors slow, and the transmission mechanism of monetary policy improves,” it added. “Given the higher costs of borrowing and the likely reduction of public spending following the finalisation of an IMF deal, credit growth to the government will likely slow.”

The research institution said banks could however be more willing to lend to the government at the new higher interest rates with a weaker demand for credit from the private sector, “thereby potentially improving the transmission mechanism of monetary policy”.

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