MPC Interest Rate Hike: The positive and negative impacts - Parthian Securities - Your Smart Brokerage Firm

The Monetary Policy Committee (MPC) held its 5th meeting of 2022 on the 26th and 27th of September. The committee members voted unanimously to raise the key interest rate.

Key decisions:

• – Increase the Monetary Policy Rate (MPR) from 14.00% to 15.50%.
• – Retain the asymmetric corridor at +100/–700 basis points around the MPR.
• – Increase the Credit Reserve Ratio (CRR) to 32.5% from 27.5%
• – Retain Liquidity Ratio at 30.0%.

Likely Impact of Interest Rate Hike

Impact on Customers: Negative and Positive

Higher borrowing cost due to the pass-through effect of higher interest rates. On the other hand, bank customers might see higher savings rate in the bank.

Impact on Inflation: Mild

We are of the opinion that the MPC’s decision might have little impact on taming the burgeoning inflation as adverse supply-side shock continues to fuel inflationary pressure.

Impact on the equities market: Negative

The equities market is expected to become less attractive due to the expected increase in yields in the fixed income in the coming months. The direction of yields in the fixed income market has an inverse relationship with the equities market.

Impact on the fixed income market: Positive

The fixed income market will likely be more attractive, especially at the long end of the yield curve.  

Impact on foreign capital flow: Mild

On foreign capital flow, we expect little foreign investor participation due to FX repatriation and exchange rate issues.

Impact on Banks: Negative and Positive

Banks stand to benefit from the higher interest rate environment. However, due to the increase in the cash reserve ratio to 32.5%, banks’ liquidity might come under more pressure.