KARACHI: The Monetary Policy Committee (MPC) of the State Bank Pakistan (SBP) will unveil monetary policy on July 7, 2022 with expectation of further monetary tightening due to higher inflation outlook.

The MPC of the SBP will meet on Thursday (July 7) to review the economic indicators to decide about the key policy rate for next two months. Acting Governor State Bank of Pakistan, Dr Murtaza Syed will chair the meeting of the committee and will also announce the monetary policy in a press conference on the same day after the MPC meeting.

In the previous meeting held on May 23, the MPC raised the policy rate by 150 basis points to 13.75 percent aimed at containing the rising inflation and mitigating the risks to external stability. The current policy rate of 13.75 percent is the highest since June 2011. In addition to policy rate increase, the MPC, in its previous meeting also decided to raise the interest rates on Export Finance Scheme (EFS) and Long-Term Financing Facility (LTFF) loans.

Although, the analysts have mixed views for the upcoming policy, most of them are expecting further increase in the key policy rate ahead of higher inflation outlook. As the government has withdrawn subsidies on petroleum products, CPI for the month of Jun’22 clocked-in at 21.32 percent YoY. Month on Month it stood at 6.34 percent. Average inflation to 12.09 percent in FY22 compared to 8.90 percent in FY21.

In addition, the current account is also deteriorating and posted a deficit of $15.199 billion during the eleven months of FY22 compared to $1.183 billion in the same period of FY21. The record trade deficit of $48.3 billion, up by 55 percent, during FY22 largely contributed to the higher current account deficit.

The country’s foreign exchange reserves are also sliding due to slow foreign inflows and higher external payments. During the week ended on 24 Jun-2022, SBP received proceeds of China Development Bank loan amounting to RMB 15 billion. After accounting for external debt repayment, SBP’s reserves increased by $ 2.071 billion to $ 10.309 billion. Analysts at Arif Habib Limited expect the SBP to increase the policy rate by 100 basis points (bps) to 14.75 percent in the upcoming monetary policy.

They said that in addition to policy rate hike, the MPC might also take further actions to anchor inflation expectations and maintain external account stability. These include an increase in the interest rate on the EFS and LTFF loans and implementation of linking of these rates to the policy rate, as decided in the last MPS.

Copyright Business Recorder, 2022