KARACHI: The Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) has decided to keep the policy rate unchanged at 22 percent as some risks to inflation outlook are emanating from global oil price volatility, circular debt resolution impact and budgetary measures.
The scheduled meeting of the MPC was held on Monday and SBP Governor Jameel Ahmed chaired the meeting. The next monetary policy meeting will be held on June 10, 2024. The policy rate is stable at 22 percent since June 2023.
During the meeting the committee noted that the macroeconomic stabilization measures are contributing to considerable improvement in both inflation and external position, amidst moderate economic recovery. However, the MPC viewed that the level of inflation is still high.
7th straight status quo: SBP holds key interest rate at 22%
At the same time, global commodity prices appear to have bottomed out with resilient global growth. The recent geopolitical events have also added uncertainty about their outlook.
Moreover, the upcoming budgetary measures may have implications for the near-term inflation outlook. On balance, the Committee stressed on continuation of the current monetary policy stance to bring inflation down to the target range of 5-7 percent by September 2025.
In line with the MPC’s expectations, inflation has continued to moderate noticeably in the second half of FY24. Headline inflation in March declined to 20.7 percent y/y from 23.1 percent in February.
Besides the coordinated tight monetary and fiscal policy response, other factors that have led to this favorable outcome include lower global commodity prices, improved food supplies and high base effect.
The Committee views inflation to continue to remain on downward trajectory. However, it noted that this inflation outlook is susceptible to risks emanating from the recent global oil price volatility along with bottoming out of other commodity prices; potential inflationary impact of resolution of circular debt in the energy sector; and tax rate-driven fiscal consolidation going forward.
Cognizant of these risks, the Committee assessed that it is prudent to continue with the current monetary policy stance at this stage, with significant positive real interest rates.
Since its last meeting, the MPC noted some key developments. First, data for the first half of FY24 suggests that economic activity is recovering at a moderate pace, led by strong rebound in the agriculture sector. Second, the current account recorded a sizable surplus in March 2024, which helped to stabilize the SBP’s FX reserves despite substantial debt repayments and weak financial inflows.
Third, inflation expectations of consumers inched up in April 2024, whereas those for businesses declined. And lastly, leading central banks particularly in advanced economies have adopted cautious policy stance after noticing some slowdown in the pace of disinflation in recent months. According to the monetary policy statement, incoming data continues to support the MPC’s earlier expectation of a moderate recovery in this fiscal year with real GDP growth projected to remain in the range of 2 to 3 percent.
Agriculture sector remains the key driver with robust 6.8 percent growth in H1-FY24 due to significant increase in rice, cotton, maize and wheat harvests.
In the industrial sector, large-scale manufacturing reported a 0.5 percent decline in July-February FY24 compared to 4.0 percent contraction recorded in the same period last year. In the services sector, the Committee noted that the growth in the first half of this fiscal year was slightly lower than expected, reflecting the impact of subdued demand. Based on relatively improved capacity utilization and business sentiments, as well as low base-effects from last year, the MPC expects value-addition from manufacturing and services sectors to recover in the coming months.
On the External Sector side, the current account has turned out better than expected, recording a sizable surplus of $619 million in March 2024, mainly owing to the Eid-related surge in workers’ remittances.
Exports continue to exhibit steady growth led by rice while imports have decreased in the wake of better domestic agriculture output and moderate economic activity. This reduction in the current account deficit amidst weak financial inflows allowed SBP to make sizable debt repayments, including that of a $1 billion Eurobond, while sustaining the SBP’s FX reserves around $8.0 billion. The MPC emphasized that a further build-up in FX buffers is essential to enhance the country’s ability to effectively respond to external shocks and support sustainable economic growth.
In line with fiscal consolidation efforts, the primary surplus increased to 1.8 percent of GDP during July-January FY24 from 1.1 percent in the same period last year led by continuous increase in revenue collection and some restraint on non-interest expenditures.
Copyright Business Recorder, 2024
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