SBP kept the policy rate unchanged at 22 percent. The markets were expecting a rate cut, and the rumor mill was abuzz. There was seemingly pressure from Islamabad to ease; and at the same time SBP would have liked to keep IMF calm, as the review is coming up. The key was to maintain a balance. SBP attempted it well. This time.

The overall monetary policy tone was better. The confidence due to better macro indicators was very visible in the briefing, and at the same time, SBP did not get carried away by the street sentiments. It was a recognition of ground realities that the external medium-term risks still remain very much persist.

There is no doubt that inflation trajectory has improved. The number in October is expected to be at 27 percent and core at 19 percent – sharp decline from September. The trajectory is that in the second half of the fiscal, it will decline significantly, and the real rates may become significantly positive on forward looking basis. These are already positive on 12M forward basis. And given the external vulnerabilities, SBP may like to keep them positive going forward and would slowly ease the policy rate.

There is some improvement in monetary aggregates. The reduction in currency in circulation and decline in the fall of the net foreign assets has improved the NFA/NDA ratio. The primary fiscal surplus is helping the cause. Thus, overall monetary side inflationary trends are improving. However, given the external vulnerabilities and structural fiscal flaws, caution is adviced.

The arrest in the depreciating trend of currency is a good omen. The flurry of inflows (mainly due to export forward selling) helped SBP to reduce its forward liabilities by a billion dollars in the last month. Then SBP started paying the pending dividends repatriation- according to the Governor, out of 128 companies, 99 have been fully paid while 29 companies’ dividends are partially repatriated.

These are steps in the right direction. However, the economy is nowhere out of the woods yet. The amount of dividend repatriated is still a fraction of pending profits and royalty. The forwards swaps are still well in negative. The NFA is still in the red. The OMOs injection is still at dangerously high levels. The external gap persists, and the spot liquidity in the foreign market is drying out.

Then the international oil and commodities prices can be volatile due to the ongoing war in the Middle East. The low level of a country’s reserves amid high external repayment could bring currency under pressure. These two factors would have bearing on the inflation outlook and SBP should keep a close watch on these, and movement in these variables to determine the next move.