7th straight status quo: SBP holds key interest rate at 22%

The Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) kept the key interest rate steady at 22% for the seventh straight meeting.

“At its meeting today, the MPC decided to keep the policy rate unchanged at 22%,” it stated in the press release issued on Monday.

“The Committee noted that macroeconomic stabilisation measures are contributing to considerable improvement in both inflation and external position, amidst moderate economic recovery.

“However, the MPC viewed that the level of inflation is still high. At the same time, global commodity prices appear to have bottomed out with resilient global growth.

“The recent geopolitical events have also added uncertainty about their outlook. Moreover, the upcoming budgetary measures may have implications for the near-term inflation outlook. On balance, the Committee stressed on continuation of the current monetary policy stance to bring inflation down to the target range of 5–7 percent by September 2025.”

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The statement added that headline inflation in March declined to 20.7% year-on-year, and core inflation fell significantly to 15.7% from 18.1% in February.

Recent geopolitical events have also added uncertainty about their outlook. Moreover, the upcoming budgetary measures may have implications for the near-term inflation outlook: MPC statement

“Besides the coordinated tight monetary and fiscal policy response, other factors that have led to this favorable outcome include lower global commodity prices, improved food supplies and high base effect. The Committee views inflation to continue to remain on downward trajectory.”

However, the Committee also noted that this inflation outlook is susceptible to risks emanating from the recent global oil price volatility along with bottoming out of other commodity prices; potential inflationary impact of resolution of circular debt in the energy sector; and tax rate-driven fiscal consolidation going forward.

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

Background

Analysts Business Recorder reached out to earlier and reports by two brokerage houses saw a slim majority expecting status quo, while the remaining predicted a ‘symbolic’ rate cut of up to 100 basis points.

The SBP last made a move on the key policy rate in June 2023, when it raised it by 100bps in an ‘emergency meeting’. Since then, in seven huddles, the SBP has kept the key policy rate unchanged, which remains at a record high of 22%.

During this time, decelerating inflation led many to believe that a monetary easing cycle was set to begin.

However, many also said the SBP will opt for caution, especially seeing that Pakistan has one last tranche of the Stand-By Arrangement (SBA) pending, and Islamabad is also seeking a longer, larger programme with the International Monetary Fund (IMF).

In another key development, the central bank’s policy decision will now be followed by the IMF Executive Board meeting to discuss the approval of $1.1 billion in funding for Pakistan, the last tranche of the $3-billion SBA.

What did analysts say before announcement

Market experts were of the view that the central bank might opt to delay any easing of monetary policy as it looks to strike a balance between spurring growth and keeping inflationary pressures in check.

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

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A report by brokerage house Arif Habib Limited (AHL) – in which it cited a divided poll result that suggested 52% respondents expect ‘no change’ in the upcoming announcement, while the remaining 48% see a cut – said the money market has also shown a mixed trend.

“In the primary market for Treasury bills (after the previous meeting), the changes have been marginal with the 3-month and 12-month yields showing no change, and the 6-month yield increasing by 0.99%,” it said in a report on April 19.

“In the secondary market, the changes have been more varied: the 3-month yield rose by 0.43%, the 6-month by 0.13%, and the 12-month by 0.45%. There was no change in the 3-year yield, a slight increase of 0.05% in the 5-year yield, and a minor decrease of 0.02% in the 10-year yield.

“These trends indicate a divided market sentiment regarding the current monetary policy stance,” it added.

AHL said rising global oil prices – which already resulted in the government hiking fuel prices in its previous announcement as it passed on the impact – are “complicating matters further”.

“At the same time, ongoing negotiations with the IMF, which has recommended maintaining a tight monetary policy, underscore the delicate balance the SBP must strike.

“With the IMF stressing the necessity for continuous economic adjustments and with Pakistan facing substantial debt repayments of $24 billion in the upcoming fiscal year, the SBP is poised to maintain a cautious policy stance.”

Meanwhile, a report by another brokerage house Topline Securities also suggested a similar expectation.

“We believe that the SBP will maintain a cautious approach despite encouraging trends and adopt a ‘watch and see’ approach until the inflation trend maintain its fall,” it said in a note.

In its analysis, Business Recorder Research also advocated caution, arguing that the “current SBP leadership would be well advised to take under consideration the lessons of the 2020-22 cycle, and the devastation premature and excessive easing can wreak on an economy”.

Previous MPC meeting

In its previous meeting on March 18, the MPC had kept the key policy rate unchanged at 22%, which was in line with market expectations, its sixth successive decision to maintain the status quo.

“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 had stated back then.

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

The rupee appreciated a marginal 0.2%, while petrol prices increased around 5%.

Internationally, oil prices have remained largely stable and were hovering over $80 per barrel amid tensions in the Middle East.

The Consumer Price Index (CPI)–based inflation clocked in at 20.7% on a year-on-year basis in March, the Pakistan Bureau of Statistics (PBS) revealed, lower than the reading in February when it stood at 23.1%.

In addition, Pakistan’s current account posted a surplus of $619 million in March 2024, a massive jump compared to the revised surplus of $98 million in the previous month.

Foreign exchange reserves held by the SBP decreased by $74 million on a weekly basis, clocking in at $7.981 billion as of April 19, data released on Thursday showed.

Total liquid foreign reserves held by the country stood at $13.28 billion. Net foreign reserves held by commercial banks stood at $5.299 billion.