SBP keeps key interest rate unchanged at 21%

The Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) has kept the key policy rate unchanged at 21%, it was announced through a statement on Monday.

“At its meeting today, the MPC decided to keep the policy rate unchanged at 21%. The MPC noted that higher inflation outturns for April and May were broadly as anticipated. The Committee also noted a sequential ease in inflation expectations of both consumers and businesses from their recent peaks,” it said in a statement.

“Further, the committee expects domestic demand to remain subdued amid tight monetary stance, domestic uncertainty and continuing stress on external account. In this backdrop, and given the declining m/m trend, the MPC views inflation to have peaked at 38 percent in May 2023, and barring any unforeseen developments, expects it to start falling from June onwards.”

The MPC said the committee noted multiple important developments since the last meeting.

“First, the provisional National Accounts estimates show real GDP growth to have decelerated considerably during FY23.

“Second, the current account balance recorded back-to-back surpluses in March and April 2023, which reduced some pressures on foreign exchange reserves.

“Third, the government unveiled the budget for FY24 on June 9, which envisages a slightly contractionary fiscal stance against the revised estimates for FY23.

“Fourth, the global commodity prices and financial conditions have eased recently and are expected to persist in near term.”

The committee took stock of the cumulative impact of the substantial monetary tightening undertaken so far, which is still unfolding.

“On balance, the MPC views the current monetary policy stance, with positive real interest rates on forward looking basis, as appropriate to anchor inflation expectations and to bring down inflation towards the medium term target - barring any unexpected domestic and external shocks.”

However, the MPC emphasised that this outlook is also contingent on effectively addressing the prevailing domestic uncertainty and external vulnerabilities.

Background

A majority of analysts had anticipated the central bank to keep the key interest rate unchanged in today’s announcement.

Since the previous Monetary Policy Committee meeting held in April 2023, in which it raised the key interest rate by 100 basis points to 21%, a number of key economic developments on the domestic front took place.

The Consumer Price Index (CPI)-based inflation clocked in at 38% in May on a year-on-year basis, the highest since 1965.

On a month-on-month basis, it increased to 1.6%, data released by Pakistan Bureau of Statistics (PBS) said.

Meanwhile, the Sensitive Price Indicator-based inflation for the week ended June 08, 2023 was recorded at 254.67 points against 254.13 points registered in the previous week, an increase of 0.21%.

On a positive note, Pakistan’s current account deficit narrowed by 76% during the first ten months of this fiscal year (FY23) mainly due to a lower import bill.

The current account recorded a deficit of $3.258 billion during July-April of FY23 compared to $13.654 billion in the same period of last fiscal year (FY22), depicting a decline of $10.39 billion.

Economists say the federal government’s measures to curtail rising imports, amid restrictions on opening letters of credit (LCs), have reduced pressure on the country’s current account.

However, there were concerns that CAD was falling “due to import restrictions and the current numbers are not realistic or market-driven”. The experts said the trend is “abnormal and unsustainable”.

However, despite import curtailments, foreign exchange reserves held by the central bank continued their downward trajectory and fell below the critical $4 billion level.

As of June 02, 2023, foreign exchange reserves held by the SBP decreased by $179 million, clocking in at nearly $3.91 billion, latest data showed.

The critical level of foreign exchange reserves underscores the need for the revival of the stalled programme with the International Monetary Fund (IMF).

Last week, it was reported that Pakistan has to satisfy the IMF on three counts, starting with a budget consistent with programme objectives, before its board will review whether to release at least some of the $2.5 billion still to be disbursed under the bailout that will expire at the end of this month.

Esther Perez Ruiz, the IMF’s resident representative for Pakistan, that there was only time for one last board review before the scheduled end of the $6.5-billion Extended Fund Facility (EFF).

“To pave the way for a final review under the current EFF, it is essential to restore the proper functioning of the foreign exchange market, pass a FY24 budget consistent with programme objectives, and secure firm and credible financing commitments to close the $6 billion gap ahead of the board,” said the IMF official.