Fitch Solutions projects that the State Bank of Pakistan will maintain its benchmark interest rate at 12.25% throughout 2019.
Pakistan and the International Monetary Fund (IMF) reached a staff-level agreement on a 39-month Extended Fund Facility (EFF) package of around USD 6 billion on May 12.
According to the latest report issued by the research agency, the recent 150bps interest rate hike will likely support stabilization in inflation over the coming months. In particular, the interest rate hike has brought the real interest rate firmly into the positive territory of around 3.5%, which should help stabilize the rupee and hence prices of imported goods.
Fitch forecast inflation to stabilize to an average of 7.0% in FY2019/20 (July-June), slightly higher than SBP’s target of 6.0% for FY2018/19, but considerably lower from the 8.8% YoY recorded in April.
Higher interest rates and a more stable currency will ease consumer price inflation which has already started to fall to 8.8% YoY in April, from 9.4% in March.
Fitch predicts that the Brent Crude prices will average USD73.00/bbl in 2019 (from year-to-date average of around USD66.00/bbl). They also believe that the recent hikes will be able to counter the inflationary pressure resulting from rising oil prices.
According to different economic analysts, the policy rates are likely to touch new heights and Rupee value will further sink to deeper pits against the US dollar in the coming months.
However, Fitch Solutions Macro Research believes otherwise as their recently published research injects a certain sense of hope in the time of crisis.
Credit Growth to Slow
The macro research agency stated that inflationary pressures will ease as credit growth in both private and public sectors slows and the transmission mechanism of monetary policy improves.
It further stated that the higher costs of borrowing and the likely reduction of public spending following the finalization of an IMF deal, credit growth to the government (which rose by 14.5% YoY in April from 11.8% YoY in April) will likely slow.
Fitch noted down that the combination of rising interest rates and slowing economic growth (they forecasted real GDP growth to slow from 5.4% in FY2017/18 to 4.4% in FY2018/19, but will be revising down our forecast within the coming weeks) will also discourage the private sector borrowing which should also help curb inflationary pressures.
Moreover, there is a chance that the interest rate hike could improve the interest rate transmission mechanism in the economy, stated the agency.
Economic Growth Set to Slow Further
Fitch believes that Pakistan’s growth is set to slow over the near term. In addition to the likely fiscal consolidation measures agreed as part of the IMF EFF deal, the 150bps interest rate hike will discourage investment as well as consumer spending.
Fitch will be revising their current forecast for Pakistan’s real GDP growth within the coming weeks.