SBP likely to cut CRR by one percent: Monetary Policy on September 29

[Naveed Yaseen]

RIZWAN BHATTI
KARACHI (September 24 2009): The State Bank of Pakistan (SBP) will issue the Monetary Policy Statement (MPS) for the next two months on September 29 with expectations of one percent cut in CRR, and no change in the key policy rate, due to liquidity shortage and some rise in monthly inflation, sources said. The Federal Bureau of Statistics (FBS) reported CPI inflation at 10.7 percent in August, down from 11.2 percent in July.

However, monthly inflation rose to 1.7 percent-third consecutive month-with an increase of over 1 percent, which is worrisome and likely to restrain SBP to ease aggressively, they added. At present, the market is witnessing liquidity shortage due to Eid festival, which compelled SBP to inject over Rs 250 billion intp the system.

The State Bank Governor, Salim Raza,while issuing the last monetary policy statement had announced to increase the frequency of monetary policy decisions from four times to six times in a year, and constitution of an independent monetary policy committee.

As per schedule, the SBP announced its last monetary policy on August 15, for July-August period, and now, following the new announcement, it will issue MPS for September-October in the last week of this month, while constitution of independent committee is still under process.

Sources said that SBP board is going to meet on Thursday, September 29, to review the monetary policy steps, liquidity and inflation position to take some new monetary decision for next two months. "The SBP will release second MPS for the current fiscal year on September 29. However, it would be announced through a press statement," said Wasimuddin, chief spokesman of SBP.

The January and July policy announcements will be accompanied with a detailed monetary policy statement and a press conference, he said, and added that on remaining four occasions the monetary policy decisions would be communicated through a brief press statement only. With no change expected in the key policy rate, economists and analysts said that SBP is likely to announce new steps for liquidity improvement.

"SBP had already cut interest rate by 200 basis points (bps) in its last two monetary policy statements and likely to further cut the rate by 200 bps, but we are expecting rate easing in November and January policy statements, primarily on account of better inflation, contained twin deficit and subdued money and credit growth," said Muzzammil Aslam, an economist.

For the upcoming MPS the central bank will keep its policy rate unchanged at 13 percent and repo rate at 10 percent due to short liquidity in the system and high inflation, he added.

SBP has conducted Open Market Operations (OMOs) seven times during the last one month with total injection of Rs 258 billion in the system, he said, and added that "the SBP is likely to revisit existing rate of Cash Reserve Requirement (CRR) and opt to reduce it by one percent to 4 percent, while every one percent cut in CRR roughly adds Rs 30 billion liquidity in the system".

Muzzammil said that liquidity conditions remained tight in the last one month despite rate easing by SBP in August, as the KIBOR is up by 47bps, T-bill yields 30bps and bond yields 50bps.

He said that fund flows from international financial institutions (IFIs) and the expected disbursements from Friends of Pakistan will render more confidence to SBP on reduced government appetite for budgetary borrowing. "On the positive side, underlying (core) inflation has reduced to 12.6 percent in August from 14.0 percent in July with full year forecast for inflation stands at 9-10 percent," Muzzammil added.

He said that SBP has already successfully launched an interest rate corridor in the last policy statement through introducing an 'overnight repo facility' that should act as a binding 'floor' and as per international with the introduction of corridor the CRR should be cut by one percent.

Since August 15, the market has utilised the Repo and reverse repo option on occasion and SBP has injected Rs 258 billion, therefore it is likely that SBP to maintain the existing spread of 300 bps in policy and repo rate, he added. It may be mentioned here that SBP by reducing key policy rate by 100 bps to 13 percent introduced a corridor for the money market to improve liquidity management, and foster stability and transparency in the money market operations. According to corridor policy rate will serve as a 'ceiling', the repo rate on the new overnight deposit facility, has stood at 10 percent some 300 bps below the SBP policy rate, will provide a binding 'floor'.

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