JS Securities Limited - JS Research.

Karachi -- January 17, 2023 (PPI-OT)

100bp hike likely in upcoming MPS, more may follow

We preview Monetary Policy to be announced on 23rd January, 2023, expecting State Bank of Pakistan to continue with monetary tightening. We expect 100bp hike, taking Policy Rate to 17%. Our expectation stems from recent developments indicating government and regulator (SBP) making all efforts to secure progress ongoing IMF program.

We also highlight, the latest Staff Report of the Fund reports SBP agreeing to achieving real positive interest rates and accomplish inflation target range of 5% - 7% over the medium term. Hence, further tightening this year may not be ruled out.

To note, longer tenor secondary market yields have moved up ~140bp post Nov-2022 MPS announcement, while shorter tenor yields have inched up ~20bp during the same time, which reflects changes in investors' long-term interest rate outlook.

Expect 100bp hike as inflationary pressures continue

We preview the Monetary Policy to be announced on 23rd January, 2023, where we expect the State Bank of Pakistan to continue with monetary tightening and announce a further 100bp hike, taking Policy Rate to 17%. If so, the benchmark interest rate would go to a 25-year high, where last the interest rate (which was the Discount Rate before) were at these levels was in the late 90s.

Our expectation stems from the recent developments that indicate the government and regulator (SBP) are making all efforts to secure progress on the ongoing IMF program, which has not shown much progress on its 9th review pending since Nov- 2022. To recall, advancement in IMF's program would unlock fresh FX inflows for Pakistan, where import cover has now dropped to just 4 weeks.

The recent developments include progress on resolution of pending gas circular debt, reduction in subsidized loan rates for exporters and industries for expansion etc. Hence, given the country's escalating core inflation trend, we believe SBP would also take IMF's recommendation to continue using monetary tools that would help to reduce...