Monetary policy: SBP keeps policy rate unchanged at 9.75%

State Bank of Pakistan (SBP) Governor Dr Reza Baqir announced that the key interest rate will be maintained at 9.75%.

Most analysts were expecting no change in the policy rate, but a small proportion also believed a marginal hike was on the cards.

However, the SBP, in its previous statement, had hinted that monetary policy settings are to remain broadly unchanged in the near-term.

On Monday, Dr Baqir said the interest rate would be maintained.

"We have taken a number of measures to manage demand, and want to see their impact," said Dr Baqir.

MPC statement

In a statement after the press conference, the SBP said since the last meeting on December 14, 2021, several developments suggest that demand moderating measures are gaining traction and have improved the outlook for inflation.

If future data outturns require a fine-tuning of monetary policy settings, the MPC expected that any change would be relatively modest: Monetary Policy Statement

These measures include a cumulative 275-basis-point increase in the policy rate, higher bank cash reserve requirements, regulatory tightening of consumer finance, and curtailment of non-essential imports.

“Recent economic growth indicators are appropriately moderating to a more sustainable pace," it said.

"While year-on-year headline inflation is high and will likely remain so in the near term due to base effects and energy prices, the momentum in inflation has slowed with month-on-month inflation flat in December compared to a significant rise of 3% in November.

"The current account deficit appears to have stopped growing since November and the non-oil current account balance is expected to achieve a small surplus for FY22. Finally, and importantly, the enactment of the recent Finance (Supplementary) Act, 2022 represents significant additional fiscal consolidation compared to the budget and has lowered the outlook for inflation in FY23."

The Monetary Policy Committee (MPC) added that looking ahead, current real interest rates on a forward-looking basis are appropriate to guide inflation to the medium-term range of 5-7%, support growth, and maintain external stability.

“If future data outturns require a fine-tuning of monetary policy settings, the MPC expected that any change would be relatively modest,” it said.

Talking about overall economic growth, MPC forecasted a 4-5% GDP growth in FY22, which is slightly lower than previous expectations in light of moderating demand indicators and higher base effects from the upward revision in last year’s growth rate.

“Risks to the outlook include, on the domestic front, the current growing Omicron wave and, on the external front, the possibility of faster than anticipated tightening by the US Federal Reserve and geopolitical events in Europe that may have implications for global financial conditions,” it said.

On external front, MPC expected that the current account deficit is expected to decline through the remainder of FY22, as import growth slows in response to a normalisation of global commodity prices and the fuller impact of demand-moderating measures.

Overall, growth in FY22 is expected around the middle of the forecast range of 4-5 percent: Monetary Policy Statement

However, it warned that the deficit could be larger if global commodity prices take longer to normalise.

On the other, it could be smaller if the fiscal consolidation associated with the Finance (Supplementary) Act has a faster and more pronounced impact on demand.

On fiscal front, MPC noted that looking ahead with the passage of the Finance (Supplementary) Act, the fiscal deficit is projected to be around 0.5% of GDP lower than previously expected for FY22.

Talking on inflation, the MPC was of the view that together with low base effects, one-off cost-push pressures from energy tariff increases and the removal of tax exemptions in the Finance (Supplementary) Act are likely to keep year-on-year inflation elevated over the next few months, close to the upper end of the average inflation forecast of 9-11% in FY22.

“However, during FY23, inflation is expected to decline toward the medium-term target range of 5-7 % more quickly than previously forecasted as demand-side pressures wane faster due to the Finance (Supplementary) Act and recent moderation in economic activity indicators,” it said.

Background

In the previous monetary policy meeting held on December 14, 2021, the Monetary Policy Committee (MPC) of the SBP decided to raise the policy rate by 100 basis points to 9.75% to address risks related to inflation and the balance of payments. The central bank has already increased the policy rate by 275 basis points since September.

Last year in November, the SBP also decided to increase the number of MPC meetings from six to eight times a year in line with international best practices. As per schedule, the next meeting (after January 24) will be held on March 8, 2022.

Dr Baqir last month also said that the central bank will take a "pause" in its interest rate hikes to sustain economic recovery.

In an interview to Bloomberg, he had stated, “We don’t want to be late in trying to ensure that inflation expectations remain anchored and therefore, we have raised rates by accumulative 275bps since September. We have also indicated in our Monetary Policy Statement as forward guidance that now we are going to take a pause.

“We are going to take a pause to first look at the effects of the tightening that we have already done, and then we will consider what monetary policy settings should be afterwards.”

Previous MPC meetings

September 2021: First hike in over 2 years: SBP raises key interest rate by 25 basis points

November 2021: Monetary policy: SBP raises key interest rate by 150 basis points, takes it to 8.75%

December 2021: 3rd successive hike: SBP increases key interest rate by 100 basis points, takes it to 9.75%

Upcoming MPC meetings

March MPC meeting: Tuesday, 8th Mar 2022

April MPC meeting: Tuesday, 19th Apr 2022

June MPC meeting: Friday, 10th Jun 2022