Washington December 8 2022: State Bank of Pakistan could hike interest rate by another 400bps if policy orthodoxy returns says JP Morgan in its latest research report.
The report states that the SBP raised the policy rate by 100bps to 16% in November, against JPM and consensus expectations for a hold, citing strong and persistent inflationary pressures. This is an abrupt change from the dovish tone adopted since August when the central bank signaled a greater emphasis on supporting growth in the aftermath of the floods.
To some extent, the rate hike could reflect implicit pressure from the IMF to stay on top of inflation ahead of the delayed 9th EFF review as well as a pre-emptive move to guard against currency pressures ahead of high-profile external debt servicing (e.g., US$1 billion Eurodollar bond payment in December) even as reserves continue to fall.
In our view, if policy orthodoxy against inflation returns and stays, the SBP remains behind the curve based on their historical reaction function. We now pencil in another 400bps of hikes, bringing the policy rate to 20% by end-FY23.
