The State Bank of Pakistan (SBP) has kept the interest rate unchanged at 9.75%, it was announced on Tuesday.

The Monetary Policy Committee (MPC) in its statement said that the status quo was maintained, which reflects MPC’s view that the outlook for inflation has improved following the cuts in fuel prices and electricity tariffs announced last week as part of the government’s relief package.

“At the same time, high-frequency indicators suggest that growth continues to moderate to a more sustainable pace.

Since the Russia-Ukraine situation remains fluid, the committe is prepared to meet earlier than the next scheduled meeting in late April, if necessary: MPC

“This moderation should help keep at bay demand-side pressures on inflation and contain non-oil imports, notwithstanding the significant uncertainty about the future path of global energy and food prices due to the Russia-Ukraine conflict,” said the SBP.

Inflation expectations

The MPC said that since its last meeting, the headline inflation moderated in February to 12.2% YoY.

“Inflation in February would have been noticeably lower were it not for abnormal increases in a few perishable items. Accordingly, core inflation also fell in urban areas and inflation expectations have remained stable, suggesting that second-round effects from higher commodity prices remain contained.

“On the external front, despite the rise in global prices, the February trade deficit witnessed a further 10% contraction MoM on top of the 29% percent decline recorded in January, confirming the slowdown in domestic demand.

Current Account Deficit

“While the current account deficit rose in January, this largely reflected lumpy imports of oil, vaccines and other items financed through loans and supplier credit. Excluding these imports, the deficit would have been about $1 billion lower, suggesting that the underlying trend in the current account balance is also moderating.

MPC added that while current real interest rates on a forward-looking basis are appropriate to guide inflation to the medium-term range of 5-7 percent, support growth, and maintain external stability.

Russia-Ukraine conflict

“(However,) the Russia-Ukraine conflict has introduced a high degree of uncertainty in the outlook for international commodity prices and global financial conditions.

“Continued adverse conditions on these fronts could pose challenges to the outlook for the current account deficit and inflation expectations, which could necessitate changes in the policy rate. Since the Russia-Ukraine situation remains fluid, the MPC noted that it was prepared to meet earlier than the next scheduled MPC meeting in late April, if necessary, to take any needed timely and calibrated action to safeguard external and price stability."

MPC outlook

The central bank MPC stated that it expects inflation to average between 9-11% this fiscal year before declining toward the medium-term target range of 5-7% in FY23 as global commodity prices normalize.

“This baseline outlook is subject to risks from the path of global prices, domestic wage developments, and the fiscal policy stance.

“The MPC will continue to carefully monitor developments affecting medium-term prospects for inflation, financial stability, and growth.”

Background

In the previous meeting held on January 24, 2022, the Monetary Policy Committee (MPC) of the SBP had decided to keep the policy rate unchanged at 9.75%, stating that several developments suggest demand-moderating measures are gaining traction and have improved the outlook for inflation.

In the Jan-22 meeting, the MPC forward guidance suggested that real interest rates on a forward-looking basis were appropriate and any changes would be relatively modest.

“If future data outturns require a fine-tuning of monetary policy settings, the MPC expected that any change would be relatively modest,” stated the MPS then.

However, since the last MPC, a number of key developments have taken place. The Russia-Ukraine situation has completely changed the commodity landscape, as prices of oil, coal and wheat have risen significantly.

“Crude oil up 50%, coal up 140%, and wheat up 57% since the last MPC,” said Ismail Iqbal Securities in its report.

On the other hand, the government also decided to cut petroleum products' rates and electricity rates by Rs10 per litre and for Rs5 per unit for the next four months as it looked to tame inflation.

Market divided over upcoming monetary policy decision

Given the volatile situation, market participants were previously divided over the decision regarding the key interest rate, also called the policy rate.

Brokerage house, Topline Securities, conducted a poll featuring market participants on expectations over the interest rate. As per the poll, around 53% of the participants believed that there will be no change, whereas 44% believed that there will be an increase in the policy rate. Only 3% of the participants anticipated a cut in the policy rate.

Similar results were found by Ismail Iqbal Securities in its poll survey as well.

About 48% of the market participants expected no change, 33% expected rates to go up by 50bps, 10% expected rates to go up by 25bps. Only 5% of the participants anticipated a policy rate hike of 75bps.

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“Considering International Monetary Fund’s (IMF) supportive tone and extremely fluid global situation, we expect the SBP to hold the rates stable in March, 2022 policy meeting,” it said.

Upcoming MPC meetings

As per the schedule, the next meeting (after March 08) will be held on April 19, 2022.

Previous MPC meetings

September 2021: First hike in over 2 years: SBP raises key interest rate by 25 basis points

November 2021: Monetary policy: SBP raises key interest rate by 150 basis points, takes it to 8.75%

December 2021: 3rd successive hike: SBP increases key interest rate by 100 basis points, takes it to 9.75%

January 2022: Monetary policy: SBP keeps policy rate unchanged at 9.75%

Upcoming MPC meetings

April MPC meeting: Tuesday, 19th Apr 2022

June MPC meeting: Friday, 10th Jun 2022