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SBP Maintains Policy Rate at 22% over Elevated Inflation

Monetary Policy Committee notes improving economic indicators but maintains current account deficit for FY24 will stand at 0.5-1.5% of GDP

by Staff Report

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The State Bank of Pakistan (SBP)’s Monetary Policy Committee on Monday maintained its policy rate at 22 percent for a fifth consecutive time, with central bank Governor Jameel Ahmad stating this was largely due to persistently elevated inflation levels.

In a statement, the committee said the “frequent and sizeable” adjustments in energy prices had slowed pace of anticipated decline in inflation, but noted non-energy inflation continued to moderate in line with expectations. “This trend reflects the positive impact of tight monetary policy stance duly supported by ongoing fiscal consolidation, lower global commodity prices, and improved domestic crop output and supplies,” it said, stressing reforms were required to address underlying structural issues, especially those in the energy sector, to achieve price stability on a sustainable basis.

The MPC has projected average inflation for the ongoing fiscal year to fall in the range of 23-25 percent and continue to trend down noticeably in the next fiscal year. In the long-term, it said, it expected to achieve the inflation target of 5-7 percent by September 2025.

According to the MPC, Pakistan’s foreign exchange reserves have improved on the back of a notable surplus in the current account in December and significant financial inflows, including the latest tranche of the ongoing $3 billion Standby Arrangement with the International Monetary Fund (IMF). It said recent surveys also suggested improvement in business sentiments. However, it warned, escalated geopolitical tensions in the Red Sea region pose risks for global trade and commodity prices.

Data, it said, supports the assessment of moderate economic recovery, primarily led by the agriculture sector. In the industrial sector, it said, large-scale manufacturing registered a slight decline in the first five months of FY24, with a moderate increase recorded in November. It expected the industrial sector to improve further the second half of the ongoing fiscal year.

The MPC said the current account surplus of December 2023 had helped reduce the deficit of the first half of FY24 by 77 percent to $0.8 billion. At the same time, exports increased by 5.3% year-on-year, due to growth in rice and volume of HVA textiles, while imports declined considerably due to lower international commodity prices, better domestic crop output, and a decline in oil import volumes.

Workers’ remittances, per the MPC, also improved for the second consecutive month in December. Despite these positive trends, it said, the projection of current account deficit for FY24 remained unchanged at 0.5-1.5% of GDP

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