The State Bank of Pakistan (SBP)’s monetary policy committee will convene on Jan 22’21 to set interest rates for the next 2 months. We project the central bank to opt for a status quo and keep interest rates unchanged at 7.00%.
Our stance is largely underpinned upon:
1) contained external accounts with a current account surplus registering at USD 1.64bn during 5MFY21,
2) synergy between monetary and fiscal policy as economic recovery takes precedence, and
3) a relatively softer inflation outlook in the coming months amidst the high-base effect.

An accommodative monetary policy needed to support growth momentum

Pakistan’s economy has witnessed a sharp recovery in its output with the recent monthly LSM figure depicting a growth of 14.4% during Nov20. Moreover, manufacturing output has recovered by 72% from its lows seen back in Apr20, while cumulatively, overall output has registered a growth of 7.4% during 5MFY21. To ensure sustained momentum of the exhibited economic recovery, the central bank is projected to maintain interest rates.

A controlled external account providing cushion for growth policies

As mentioned, Pakistan’s external accounts have recorded a surplus of USD 1,640mn during 5MFY21 while the country’s overall reserves have once again crossed the USD 20bn mark. We believe a stable external account will afford the country to push for growth without inducing the risk of ‘overheating’ the economy or catalyzing external account imbalances.

Monetary tightening likely by the end of FY21

High growth momentum in tandem with a stable external account can potentially allow interest rates to remain unchanged during FY21. The central bank, however, may remain wary of rising international oil prices and the eventual energy tariff hike amidst a probable re-entry into the IMF program during 1QCY21.
Nevertheless, we push back our monetary tightening projection by 2 months to May20 as the external account surplus has sharply exceeded our initial expectations. We project a 100bps hike during May20 and expect interest rates to peak at 8.5% by the end of CY21.

CPI inflation projected at 6.14% during Jan21

We project CPI inflation to register at 6.14% during Jan21 against 7.97% during Dec20 and 14.56% during Jan20. Cumulatively, inflation is projected to register at 8.28% during 7MFY21 against 11.60% during SPLY.
Inflationary pressures are expected to ease during Jan21 supported by the federal government’s resolve to control food prices via addressing supply issues. Consequently, the food index is estimated to fall by 0.9% M/M during the month. Moreover, Jan20’s high inflation base is also projected to support a low inflation reading.


Potential respite, however, is expected to be offset by recovering global oil prices, which is being reflected in the domestic petroleum prices. Moreover, the quarterly housing index revision is also expected to limit inflation’s downside potential for the month.