SBP keeps key policy rate unchanged at 22%

The State Bank of Pakistan (SBP) has kept the key policy rate unchanged at 22%, central bank governor Jameel Ahmad announced on Monday.

“As per the assessment of SBP’s analysts, the inflation rate in the coming fiscal year is expected to be in a range of 20-22%,” said Ahmad. “The Monetary Policy Committee (MPC) also noted that inflation will be lower in the coming months, and will especially decline in the second half of the fiscal — from January to June.

“The SBP’s medium-term outlook for inflation remains at 5-7%, We will see inflation come down to this level by the end of fiscal year 2025.”

Ahmad added that the committee deliberated on Pakistan’s economic outlook and endorsed the assessment that growth is expected to be around 2-3% in the ongoing fiscal year.

While some upside risks to the inflation outlook have emerged, the committee also took note of the expected lagged impact of the accumulated monetary tightening so far, budgeted fiscal consolidation, and the tepid growth outlook for FY24: MPC statement

In a statement released after the announcement, the MPC noted that the economic uncertainty has decreased since the last meeting, whereas near-term external sector challenges have been largely addressed and investor confidence has shown improvement.

“While some upside risks to the inflation outlook have emerged, the committee also took note of the expected lagged impact of the accumulated monetary tightening so far, budgeted fiscal consolidation, and the tepid growth outlook for FY24,” the SBP said in a statement.

“The MPC particularly noted that year-on-year (y/y) inflation is likely to remain on downward path over the next 12 months, which implies a significant level of positive real interest rate.”

It also expected the current account deficit to remain contained in the range of 0.5 to 1.5% of GDP in FY24.

Background

Earlier, some analysts had expected status quo in the monetary policy announcement, while others saw a rate hike in the range of 100-200 basis points.

In its meeting on June 12, 2023, the Monetary Policy Committee had kept the key policy rate unchanged at 21%. Back then, it said that it expects domestic demand to remain subdued amid the 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.”

However, on June 26, the MPC convened an emergency meeting, and decided to raise the policy rate by 100 bps to 22% to keep real interest rate firmly in the positive territory on a forward-looking basis. It cited “certain upward revisions in taxes, duties and PDL rate in FY24 budget” and the SBP’s withdrawal of the general guidance for commercial banks on prioritisation of imports as having increased the “upside risks to the inflation outlook” for the rate-hike.

Since that meeting, a number of key economic developments on the domestic front took place. Pakistan finally managed to sign a staff-level agreement with the International Monetary Fund (IMF), which provided massive relief to policymakers as well as the currency and stock markets.

The Consumer Price Index (CPI)-based inflation clocked in at 29.4% in June on a year-on-year basis, as compared to 38% recorded in May. Analysts expect inflation to hover around 27-28% in July, but a power tariff hike – approved last week – may present an upside risk to inflation.

Meanwhile, the Sensitive Price Indicator-based inflation for the week ended July 26, 2023 was recorded at 268.08 points against 258.45 points registered in the previous week, an increase of 3.73%.

On a positive note, Pakistan’s current account deficit posted a surplus for the fourth successive month, clocking in at $334 million in June 2023, mainly due to a lower import bill. However, as dollar inflows materialise, imports may start to pick up again.

Meanwhile, foreign exchange reserves held by the central bank improved significantly, and remained above the $8 billion level.

As of July 21, 2023, foreign exchange reserves stood at $8.1861 billion mainly due to due to external debt repayments, latest data showed.

In addition, the IMF in its country report also emphasised that the SBP will need to continue its tightening cycle to re-anchor expectations given that inflationary pressures are expected to persist over the coming year, including because the impact of exchange rate corrections will continue to reverberate through the economy.