KARACHI: The rupee is expected to remain broadly stable through the current oil price shock, with the adjustment likely to come through higher domestic fuel prices, weaker consumption and imports, and, if needed, tighter monetary policy, a note on the currency’s outlook said on Saturday.
The rupee continued to trade in narrow ranges, closing at 277.15 against the dollar in the interbank market on Monday. It ended at 277.07 on Friday.
Pakistan’s authorities expect inflation to average around 7.5 percent if oil returns towards $80 a barrel and around 8.2 percent if it stays near $100, Tresmark, a financial terminal, said in a note. They also expect inflation to moderate after December and argue the central bank’s 11.5 per cent policy rate remains appropriate.
“A stable PKR helps contain imported inflation,” the note said, adding that higher domestic fuel prices allow demand and imports to adjust. “The IMF, meanwhile, continues to emphasise a more market-based exchange rate,” it said. “But a market-based PKR does not automatically mean a weaker PKR.”
If remittances stay strong, reserves keep improving, the current account remains manageable, and dollar demand is contained, price discovery could still produce a stable currency, it said.
“The base case remains that PKR will not be the adjustment mechanism for this oil shock,” the note said.
“The adjustment is more likely to come through higher domestic fuel prices, lower consumption and imports and, if inflation remains persistent, monetary policy,” it added. “Exporters continuing to sell dollars in the forward market appear to broadly share that view.”
The rupee’s outlook rests on the assumption that the energy shock is temporary. The forward curve anticipates that the current shortage will ease, and Pakistan’s inflation projections also assume oil prices eventually fall, it noted.
The Middle East conflict has triggered what the International Energy Agency has described as the largest supply disruption in the history of the global oil market. Even so, Brent crude futures peaked at around $126 a barrel in April. During the latest escalation, they rose above $110 before retreating, according to the note.
For Pakistan, however, Brent is only part of the energy bill, it said. Diesel refining margins, liquefied natural gas costs, freight, insurance and the strength of the US dollar can make a $100 oil environment considerably more painful than the benchmark price alone suggests. Pakistan has largely allowed higher fuel costs to pass through to consumers. While painful, that approach changes behaviour, as higher pump prices curb consumption and, eventually, imports, rather than shifting the entire burden onto the fiscal deficit or foreign exchange reserves.
