The monetary policy committee has kept the policy rate unchanged at 22 percent, as per the general analysts’ expectations. The recent revision of energy prices (mainly gas) has resulted in an upward revision of SBP inflation forecasts for FY24—to be precise, from 20-22 percent to 23 to 25 percent. SBP is waiting for inflation to come down before it can begin monetary easing.

There was a subtle mention of forward guidance (of lowering the rates moving forward)in this review when the Bank suggested that the real rates are ‘significantly positive’ (as compared to the previous review statement of ‘positive’) on a 12-month forward-looking basis.

It is wise for the SBP to first allow the inflation to come down, and see the impact of a further increase in energy prices (as circular debt flow has not stopped growing), and make decisions accordingly. The economy went through a turbulent period last year while SBP was behind the curve in the early days of a hike in inflation (which peaked at 38%), especially when fiscal policy was concessionary. Now it’s better for SBP to compensate for those days, although the fiscal policy is prudent now.

The other key positive development is on the external account front where not only SBP reserves are moving up but also the forward liabilities are coming down. This is due to some inflows from multilaterals after the successful IMF review and controlled current account deficit (there was a surplus last month).

SBP expects the current account deficit to remain under control. However, the load of the repayments in the financial account persists and that keeps the overall balance of payment risks alive. The debt repayment pressures will continue this year and coming years as well. Thus, keeping the current account deficit low is imperative, and economic growth must remain low. To keep the growth muted, the monetary easing should be gradual, and real interest must remain positive, going forward.

Having said that, SBP is expecting the economic growth to revive a bit. SBP has mentioned in the analyst briefing that the capacity utilization of certain industries (such as textile, and FMGCs) is increasing on a month-on-month basis. Agriculture is showing a rebound after last year’s floods. This is good news, but SBP should be cognizant of the fact that higher growth could lead to better demand and that could dent the current account deficit due to higher imports. This the SBP simply cannot afford until reserves are enough to cover 2.5-3 months of imports ($12-14 billion or higher).

Any hike in the current account deficit could result in slippage of currency and that can result in another round of inflation. Thus, SBP must tread with care, and not let the medium-term stability part get out of hand and should only encourage growth that could come from exports.

There might be some room for rate cuts going forward. And SBP should spell it out clearly by giving a roadmap in the next policy which is due in mid-March. There may or may not be a cut in mid-March, but surely, expect easing to start by next to the next policy review towards the end of April.