SBP keeps key policy rate unchanged at 22%

In line with expectations, the Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) kept the key policy rate unchanged at 22%.

“At its meeting today, the Monetary Policy Committee (MPC) decided to maintain the policy rate at 22%,” it said in a statement.

“The decision does take into account the impact of the recent hike in gas prices on inflation in November, which was relatively higher than the MPC’s earlier expectation. The Committee viewed that this may have implications for the inflation outlook, albeit in the presence of some offsetting developments, particularly the recent decrease in international oil prices and improved availability of agriculture produce. Further, the Committee assessed that the real interest rate continues to be positive on a 12-month forward looking basis and inflation is expected to remain on a downward path.”

MPC continues to expect headline inflation will decline significantly in the second half of FY24 due to contained aggregate demand, easing supply constraints, moderation in international commodity prices and favorable base effect

The statement added that the MPC noted several key developments since its October meeting.

“First, the successful completion of the staff level agreement of the first review under the IMF SBA program would unlock financial inflows and improve the SBP’s foreign exchange reserves.

“Second, the quarterly GDP growth outcome for Q1-FY24 remained in line with the MPC’s expectation of a moderate economic recovery. Third, recent consumer and business confidence surveys show improvement in sentiments. Finally, core inflation is still at an elevated level and is coming down only gradually.

“Taking stock of these developments, the Committee assessed that the current monetary policy stance is appropriate to achieve the inflation target of 5-7 percent by end-FY25. The Committee reiterated that this assessment is also contingent upon continued targeted fiscal consolidation and timely realization of planned external inflows.”

The MPC noted that the higher-than-expected increase in gas prices contributed 3.2 percentage points to the 29.2 percent y/y inflation in November 2023.

“Further, core inflation remained sticky at 21.5 percent during the month, only slightly lower from its peak of 22.7 percent in May 2023. Inflation expectation of both consumers and businesses, though improving in recent months, remain at an elevated level.

“Nevertheless, barring further sizable increase in administered prices, the MPC continues to expect that headline inflation will decline significantly in the second half of FY24 due to contained aggregate demand, easing supply constraints, moderation in international commodity prices and favorable base effect.”

What did analysts say?

Market experts Business Recorder reached out to earlier said they had expected status quo in the key policy rate on account of rise in the inflation rate.

“It is anticipated that the SBP will maintain the policy rate at 22% during this meeting,” said brokerage house Arif Habib Limited (AHL) in a report released last week.

AHL attributed the forecast to several contributing factors, including the substantial base effect, stabilisation of global commodity prices, support from the stability of the PKR against the USD, and efforts to curtail the current account deficit.

In its previous meeting on October 30, the MPC of the SBP had kept the key policy rate unchanged at 22%, citing that the decision took into consideration the latest inflation trends.

Back then, the MPC reiterated “its earlier view that the real policy rate is significantly positive on 12-month forward-looking basis and is appropriate to bring inflation down to the medium-term target of 5 – 7% by end-FY25”.

“However, the MPC noted that this outlook is based on continued fiscal consolidation and timely realisation of planned external inflows.”

It is pertinent to mention that as part of the IMF agreement, the government has committed to the Washington-based lender that it stands ready to consider further action in upcoming MPC meetings until inflation expectations are on a clear downward path.

However, despite securing a last-minute deal with the IMF, which initially provided massive relief to policymakers as well as the currency and stock markets, the economy remains engulfed with an acute balance of payment crisis, with its foreign exchange reserves diminished, along with historically high inflation and an unprecedented currency devaluation.

Background

Since the last MPC in October, several key developments on the economic front took place.

The rupee depreciated a marginal 1%, while petrol prices decreased around 1% as well. The market expects a further reduction in fuel prices amid a decline in international oil prices.

The Consumer Price Index (CPI)-based inflation clocked in at 29.2% on a year-on-year basis in November 2023 as compared to the reading in October when it stood at 26.9%, according to the Pakistan Bureau of Statistics (PBS).

In addition, Pakistan’s current account posted a deficit of $74 million in October, on account of an increase in exports and a decline in imports.

Foreign exchange reserves held by the central bank also declined and dropped below the $7.5 billion level.

As of December 1, the country’s foreign exchange reserves held by the SBP decreased by $237 million on a weekly basis, clocking in at $7.02 billion.