SBP keeps key policy rate unchanged at 22%

The Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) has kept the key policy rate unchanged at 22%, its sixth successive decision to maintain the status quo.

“At its meeting today, the MPC decided to keep the policy rate unchanged at 22%,” it said in a statement on Monday.

“In approaching the decision, the MPC noted that inflation, in line with earlier expectations, has begun to decline noticeably from H2-FY24.

“It, however, observed that despite the sharp deceleration in February, the level of inflation remains high and its outlook is susceptible to risks amidst elevated inflation expectations. This warrants a cautious approach and requires continuity of the current monetary stance to bring inflation down to the target range of 5–7% by September 2025.”

Amidst uncertainty regarding the inflation outlook, key central banks in both advanced and emerging economies have continued to maintain a cautious monetary policy stance in recent meetings: MPC statement

The statement said the MPC has reiterated that this assessment is also contingent upon continued targeted fiscal consolidation and timely realisation of planned external inflows.

The central bank added that latest data continues to depict moderate pick-up in economic activity, led by rebound in agriculture output. “Second, the external current account balance is turning out better than anticipated and has helped maintain FX buffers despite weak financial inflows. Third, while inflation expectations of businesses have shown a steady increase since December, those for consumers have also inched up in March. Lastly, on the global front, while the broader trend in commodity prices remained benign, oil prices have increased; partly reflecting the continued tense situation in the Red Sea.

“Moreover, amidst uncertainty regarding the inflation outlook, key central banks in both advanced and emerging economies have continued to maintain a cautious monetary policy stance in recent meetings.”

The MPC noted that any further adjustments in administered prices or fiscal measures that may push prices up pose risk to the near- and medium-term inflation outlook.

“Cognizant of these risks, the Committee assessed that it is prudent to continue with the current monetary policy stance at this stage.”

Background

Market experts Business Recorder reached out to earlier were divided with some anticipating the MPC to maintain status quo as Pakistan is engaged in talks with the International Monetary Fund (IMF) that has historically advised caution in monetary easing.

Some had said that developments including a fall in CPI inflation, manageable current account deficit, stable local and international oil prices as well as the currency could be factors advocating a rate cut.

Mohammed Sohail, CEO of brokerage house Topline Securities, had said: “We believe that the SBP will remain cautious despite the above-mentioned encouraging trends and adopt a ‘watch and see’ approach until the inflation trend maintains its fall.”

In its article on Friday, BR Research had also said that the SBP “should move with extra caution and keep real rates positive on current inflation”, arguing that to keep a delicate balance, slow and gradual easing is the order of the day.

“Expect around 200 bps cut in April, and SBP must maintain the policy rate on Monday,” it added.

On the other hand, Arif Habib Limited (AHL), another brokerage house, had seen a “strong possibility” that the SBP may cut the key policy rate by 100 basis points (bps).

AHL, in its report released earlier, had said there was a “strong possibility that the SBP may contemplate kickstarting the interest rate reversal cycle by implementing a 100bps cut in the upcoming policy”.

The brokerage house attributed its projection to a declining inflation rate and money market yields.

“We believe a data-driven approach will be pivotal in forming the SBP’s decision-making process,” it had said.

“This approach would likely take into consideration the downward trajectory of both headline and core inflation, which we anticipate to average approximately 17% and 15%, respectively, (on a 12-month forward basis), resulting in significantly positive real interest rates on a forward-looking basis.”

In its previous meeting on January 29, the MPC of the SBP had kept the key policy rate unchanged at 22%, which was in line with market expectations.

The MPC noted that “the external account (position) has become better.”

The MPC also revised its inflation projection for fiscal year 2023-24 from 20-22% to 23-25%, considering the latest round of energy tariff hikes.

Since the last MPC in January, several key developments on the economic front have taken place.

The rupee appreciated a marginal 0.3%, while petrol prices increased around 6%.

Internationally, oil prices remain volatile amid an escalation of tensions in the Middle East.

The Consumer Price Index (CPI)–based inflation clocked in at 23.1% on a year-on-year basis in February, according to the Pakistan Bureau of Statistics (PBS), much lower than the reading in January when it stood at 28.3%.

In addition, Pakistan posted a current account deficit of $269 million in January 2024, against a surplus of $404 million in December 2023.

Foreign exchange reserves held by the SBP increased by $17 million on a weekly basis, clocking in at $7.91 billion as of March 8, data released on Thursday showed.

Total liquid foreign reserves held by the country stood at $13.15 billion. Net foreign reserves held by commercial banks stood at $5.24 billion.

It may be mentioned here that during the last few months, the interest rate on short-term government papers declined notably due to lower inflation.

Pakistan is also likely to sign the staff-level agreement with the IMF, sources said on Saturday.