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SBP Maintains Policy Rate at 22%

Monetary Policy Committee says it expects inflation to increase significantly in September before declining from October-onwards

by Staff Report

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The State Bank of Pakistan (SBP) Monetary Policy Committee on Thursday decided to maintain the policy rate at 22 percent, noting this took into account an ongoing declining trend in inflation.

“Even though global oil prices have risen recently and are being passed on to consumers through adjustment in administered energy prices, inflation is projected to remain on the downward trajectory, especially from the second half of this year,” read the Monetary Policy Statement. “As such, real interest rates continue to remain in positive territory on a forward-looking basis. Moreover, the expected ease in supply constraints owing to better agriculture output and the recent administrative measures against speculative activity in the FX and commodity markets would also support the inflation outlook,” it added.

According to the statement, the MPC noted four key developments since its last meeting in July: an improved agricultural outlook; rising global oil prices; a current deficit in July party resulting from easing of import restrictions; and the results of administrative and regulatory measures aimed at improving availability of essential food commodities and curbing illegal activities in the foreign exchange market. “This has helped in narrowing the gap between the interbank and open market exchange rates,” it added.

The MPC, per the statement, would continue to monitor risks to the inflation outlook and, if required, take appropriate action to achieve price stability. It stressed on maintaining a prudent fiscal stance to keep aggregate demand in check, noting this was necessary to bring inflation down on a sustainable basis and to achieve the medium-term target of 5-7 percent by end-FY25.

The SBP statement further noted “some improvement” in economic activity, including sales of key inputs such as fuel and cement, and an improved outlook of the agriculture sector. “Earlier concerns related to floods have subsided and cotton arrivals almost doubled from last year,” it said, adding domestic demand would likely remain “contained” due to the impact of monetary tightening and envisaged fiscal consolidation. “These developments are broadly in line with the MPC’s earlier expectations about moderate growth this year,” it said.

Noting a current account deficit of $809 million in July 2023 after four months of surplus, the MPC said this was in line with an expected rise in imports after easing of restrictions. “Favorable rice prices and available surplus bode well for the export outlook,” it said, adding reforms related to exchange companies would strengthen their governance structure and improve market functioning.

On the revenues of the Federal Board of Revenue (FBR), the SBP said the first two months of the ongoing fiscal year had recorded a 27.2 percent increase year-on-year. “This improvement reflects the impact of both fiscal measures and some recovery in economic activity,” it said, stressing achieving a targeted primary surplus of 0.4 percent of GDP was “critical” to achieving price stability. “More importantly, attaining fiscal consolidation through broadening the tax base, providing targeted subsidies only to the most vulnerable, and reducing losses of public sector enterprises through privatization or reforms would help bring inflation down in the targeted range and achieve sustainable economic growth over the medium term,” it added.

Referring to data as of Sept. 1, the MPC said broad money growth had decelerated to 13.6 percent on year-on-year basis from 14.2 percent at the end of June, primarily due to a significant slowdown in credit to the private sector. Similarly, it said, growth in reserve money had also decelerated in the ongoing fiscal, reflecting a significant reduction in currency in circulation. “Going forward, expected fiscal consolidation, realization of planned external inflows and uptick in economic activity would provide space for a moderate expansion in private sector credit this year,” it said.

On inflation, the MPC said it had decelerated to 27.4 percent in August on year-on-year basis from 28.3 percent in July. Noting this was lower than anticipated due to a surge in global oil prices, it claimed this was partly reflective of the impact of heightened uncertainty in the FX markets—particularly the open market. However, it added, recent regulatory and law-enforcement measures would help address supply constraints in commodity and illegal activity in FX markets.

“The MPC also noted that inflation is likely to increase significantly in September mainly due to base effect and the adjustment in energy prices. It is expected that inflation will subsequently decline in October and maintain its downward trajectory from thereon,” it added.

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