State Bank of Pakistan unveiled its Monetary Policy Statement (MPS) for the next two months over the weekend, keeping the discount rate intact at 12.5%
Our long standing view that monetary easing rests on improvement in fiscal position is on track. The MPS has again touched on the key usual suspects; weak fiscal position and uncertainty on foreign flows.
Moreover, SBP has also touched upon the much feared policy reversal stance which it believes would be unhealthy for still nascent recovery, inline with our view.
While the outcome is in line with expectations, a minor section might be disappointed as murmurs of a positive surprise in the MPS had emerged in the last couple of days, which combined with reports of delay in IMF tranche could hurt sentiments.
While SBP’s status quo policy stance for now is appropriate with pressure on fiscal account and uncertainty on external financing staying put, we believe that room for 100-150bp cut in policy rate is available in 2010.
KASB Securities and Economics Research
29 March 2010
