Monetary policy decision, outlook projection: SBP provides rare insight into key factors

KARACHI: The State Bank of Pakistan (SBP), in its recent podcast, has given insights into the factors leading to the recent monetary policy decision, the projected economic outlook, and the impact of various recent developments.

In the 23rd episode of the SBP podcast series, Director of the Monetary Policy Department SBP, Fida Hussain, discussed the central bank’s recent monetary policy decision.

The Monetary Policy Committee (MPC) of the SBP, in its meeting on July 31, 2023, decided to maintain the policy rate at 22 percent. The MPC’s decision was influenced by several key factors.

Policy rate kept unchanged as economic uncertainty ebbs

First, the anticipated gradual decline in inflation throughout the fiscal year 2024.

Second, the positive trajectory of Pakistan’s economy, attributed to improved investor confidence due to recent developments. The latest MPC decision marked the first policy announcement after the recent Stand-By Arrangement (SBA) agreed between Pakistan and the IMF.

The discussion delved into the changes that have taken place since the last monetary policy announcement in June 2023. These changes encompass crucial aspects such as the SBA agreement, the federal budget for the fiscal year 2023 - 2024, stability in global commodity and petroleum prices, and signs of stability in the global economy.

The agreement with the IMF has led to improved market sentiments and a significant enhancement of foreign exchange reserves of the country. Despite a nominal volatility in global commodity prices, the stabilizing trend indicates a positive economic atmosphere. Moreover, business and consumer inflation expectations are on a downward trajectory, aligning with the MPC’s outlook.

The conversation also addressed concerns related to recent price adjustments in key sectors such as petroleum, electricity and upcoming gas price hikes. Mr. Hussain explained that these adjustments have been factored into the MPC’s decision-making process, with specific considerations about their impact on inflation.

The podcast highlighted the removal of import restrictions and its potential effects on the exchange rate and inflation. The discussion emphasized how the current high policy rate of 22 percent has subdued domestic demand, thereby minimizing the potential pressure on the foreign exchange rate due to the removal of import restrictions.

The podcast concluded by explaining the concept of real interest rates and their impact on economic behavior. Positive real interest rates incentivize saving and discourage borrowing, ultimately leading to lower consumption and controlled inflation.

The episode offers an insightful assessment of the reasoning behind the latest monetary policy decision, considering various domestic and global factors. It provides a comprehensive overview of the economic landscape in Pakistan, making it an important conversation for those seeking to understand the country’s monetary policy approach and economic trajectory.

Copyright Business Recorder, 2023