Monetary policy: SBP maintains status quo, keeps key interest rate unchanged at 15%

The Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) has maintained the key interest rate at 15%, it was announced on Monday.

“The MPC noted the continued deceleration in economic activity as well as the decline in headline inflation and the current account deficit since the last meeting. It also noted that the recent floods have altered the macroeconomic outlook and a fuller assessment of their impact is underway,” the MPC was quoted as saying in the monetary policy statement.

“Based on currently available information, the MPC was of the view that the existing monetary policy stance strikes an appropriate balance between managing inflation and maintaining growth in the wake of the floods.

“On the one hand, inflation could be higher and more persistent due to the supply shock to food prices, and it is important to ensure that this additional impetus does not spill over into broader prices in the economy. On the other, growth prospects have weakened, which should reduce demand-side pressures and suppress underlying inflation.”

The central bank MPC noted several key developments since the last MPC.

“First, the desired moderation in economic activity has become more visible and entrenched, signaling that the tightening measures implemented over the last year are gaining traction. With growth likely to slow further in the aftermath of the floods, this tightening will need to be carefully calibrated going forward.

“Second, after peaking in August as expected, headline inflation fell last month due to an administrative cut in electricity prices. However, core inflation continued to drift upwards in both rural and urban areas.

“Third, the current account and trade deficits narrowed significantly in August and September, respectively, and the Rupee has recouped some of its losses following the recent depreciation. Fourth, the combined 7th and 8th review under the ongoing IMF program was successfully completed on August 29th, releasing a tranche of $1.2 billion," it said.

Monetary and inflation outlook

The SBP said that in line with slowing economic activity, private sector credit has seen a net retirement of Rs0.7 billion so far this fiscal year, compared to an expansion of Rs62.6 billion during the same period last year.

“This decline in credit mainly reflects a retirement of working capital loans and a sharp fall in consumer finance,” it said.

On inflation, the MPC noted that after peaking in August, headline inflation fell by more than 4 percentage points in September to 23.2% (y/y), driven by a reduction in electricity prices due to administrative intervention. At the same time, the momentum of inflation also slowed by more than expected, declining by 1.2% (m/m). On the other hand, both core and food inflation picked up further, it added.

“Looking ahead, the supply-shock to food prices from the floods is expected to put additional pressure on headline inflation in the coming months. Nevertheless, headline inflation is still projected to gradually decline through the rest of the fiscal year, particularly in the second half.

“Thereafter, it should fall towards the upper range of the 5-7 percent medium-term target by the end of FY24,” it said.

MPC was of the view that a continuation of prudent monetary policy and orderly movements in the Rupee should help contain core inflation going forward. “At the same time, curbing food inflation through administrative measures to resolve supply-chain bottlenecks and any necessary imports should be a high priority,” it said.

This is the first MPC announcement since the newly appointed Governor SBP Jameel Ahmed assumed charge of the central bank back on August 26.

The announcement also comes after Ishaq Dar took charge as the Finance Minister last month. The four-time finance minister had expressed his intentions to lower the policy rate and inflation.

Impact of floods devastation

The MPC discussed the post-flood macroeconomic outlook, based on currently available information, it projected GDP growth could fall to around 2% in FY23, compared to the previous forecast of 3-4 % before the floods.

Background

A majority of market participants expect status quo in the key policy rate in the Monetary Policy Committee (MPC) meeting.

Consumer Price Index (CPI)-based inflation retreated slightly in September 2022. It clocked in at 23.2% on a year-on-year (YoY) basis, primarily due to relief provided by the government in fuel charges adjustment (FCA) in electricity bills.

On a month-on-month basis, inflation fell 1.2%, showed data released by the Pakistan Bureau of Statistics.

On a weekly basis, the Sensitive Price Indicator (SPI) based inflation recorded an increase of 0.29% due to the rise in food items’ prices

Pakistan’s current account deficit shrank by 19% clocking in $1.92 billion in Jul-Aug of FY23 compared to $2.374 billion in the same period of last fiscal year, depicting a decline of $ 456 million, due to lower import bill and increase in exports.

During the first two months of this fiscal year, imports recorded a decline of $240 million to $11.98 billion. However, exports posted an increase of $519 million to $5.093 billion in 2 months.

Back in August, the MPC of the State Bank maintained the key interest rate at 15%.

"With recent inflation developments in line with expectations, domestic demand beginning to moderate, and the external position showing some improvement, the MPC felt that it was prudent to take a pause at this stage," the MPC was quoted as saying in the monetary policy statement back then.