JS Securities Limited - JS Research.

Karachi -- March 03, 2023 (PPI-OT)

Record high CPI, record high interest rates

Policy Rate hiked by 300bp to 20% (highest since 1996), takes the cumulative increase to 1,300bp since the cycle began from Sep-2021, marking the sharpest increase since then as well. Since the last Monetary Policy announcement, higher inflationary impact from the macro adjustments has been among the core reasons of the aggressive hike.

In its post MPS briefing conducted yesterday, SBP apprised as per its current assessment it believes Policy Rate levels reflect a positive real interest rate picture based on forward looking inflation readings. Risks to inflation forecast however remain. SBP announced that the next Monetary policy will be announced in a month from now (April 4th) instead of the usual 6 weeks.

We believe current Policy Rate levels may give another push to secondary yields today. For equity markets, we reiterate our recommendation for stocks with fundamentals relatively resilient to ongoing macro adjustments, which also offer higher D/Y.

Macro adjustment Inflationary impact takes PR to 20%

The Policy Rate was hiked by 300bp yesterday, taking it to 20%, a level last witnessed 26 years ago in Pakistan. The latest leg takes the cumulative Policy Rate increase to 1,300bp in the monetary tightening cycle that began from Sep-2021, also marking the sharpest increase since at least 1996. While the last Monetary Policy meeting was just held a little over a month ago, which announced a 100bp hike, higher inflationary impact from the macro adjustments executed since then has been among the core reasons of an aggressive hike this time. To recall, macro adjustment impacts took Feb-2023 CPI to 31.5%, highest since 1965.

While the Monetary Policy Statement mentions most measures transpiring and partially reflected, there is further room for near-term inflation to move higher. SBP has also revised FY23 average CPI to 27% - 29%, from 21% - 23% estimated in Nov-2022. SBP, however, believes current Policy Rate levels reflect a real interest rate picture based on forward looking inflation readings.

We use JS estimates for monthly inflation forecasts to derive a 12 M rolling forward CPI vs current policy rate. Hence barring any unforeseen shocks, the current policy rate should take forward looking real interest rates into positive territory by May-23.

The statement's underlying assumption does not incorporate unexpected future shocks. As pressure on FX reserves are...