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Is monetary policy turning into a fiscal policy?

Against our contrarian call of a 25-50bps cut in the discount rate, the Central Bank has maintained the status quo. In our view, the SBP has ignored the sharp improvements in the macro-economy over the last twelve months and seems to be solely focused on potential risks on the fiscal side as well as inflationary expectations. Therefore, we retract our expectations of a rate cut in 1HCY10 where any rate cut in 2HCY10 is dependent on an overhaul in thinking at the Central Bank. However, we rule out any increase in rate based on our forward-oriented expectations for:

  1. “Core inflation” currently at 10%YoY, maintaining its downward trajectory
  2. Likely improvement in tax collection, especially indirect taxes, as the real economy recovers
  3. Monthly current account deficit averaging in the manageable range of +US$200mn and -US$600mn
  4. Partial materialization of Coalition Support Funds which reportedly amount to ~US$2bn
29 March 2010
AKD Research

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