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KARACHI: As per expectations, the Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) has maintained the policy rate at 9.75 percent in its meeting held Monday.

Addressing a press conference after the MPC meeting at the SBP head office, Dr Reza Baqir, Governor SBP said that this decision is in line with the forward guidance provided in the last monetary policy statement.

Looking ahead, Baqir said that as the policy measures have improved the inflation outlook, the MPC is of the view that current real interest rates on a forward-looking basis are appropriate to guide inflation to the medium-term range of 5-7 percent, support growth, and maintain external stability.

He said that although the inflation during this fiscal year will be higher, it will be within range. However, inflation is expected to be lower in next year (FY23) than (FY22). “If future data outturns require a fine-tuning of monetary policy settings, the MPC expected that any change would be relatively modest,” he added.

Headline and core inflation rose in December, both the sequential momentum of inflation and inflation expectations of businesses fell significantly. Together with low base effects, one-off cost-push pressures from energy tariff increases and the removal of tax exemptions in the Finance (Supplementary) Act are likely to keep year-on-year inflation elevated over the next few months, close to the upper end of the average inflation forecast of 9-11 percent in FY22.

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However, during FY23, inflation is expected to decline toward the medium-term target range of 5-7 percent more quickly than previously forecasted as demand-side pressures wane faster due to the Finance (Supplementary) Act and recent moderation in economic activity indicators.

The Governor SBP said that the current account deficit appears to have stopped growing since November and the non-oil current account balance is expected to achieve a small surplus for FY22. “Current account is being stabilized and posted below two-billion-dollar deficit during the last two months (Nov and Dec). With the current trend and expected fall in commodity prices in the world market, the current account deficit is likely to be $13 to $14 billion by the end of this fiscal year,” he added.

In addition, he said that with support of recent measures taken under the Finance (Supplementary) Act, the fiscal deficit will also be reduced. The enactment of the recent Finance (Supplementary) Act, 2022 represents significant additional fiscal consolidation compared to the budget and has lowered the outlook for inflation in FY23, he mentioned.

The Governor SBP that GDP growth is expected to be 4.5 percent for this fiscal year as against previous estimates of 5 percent.

Baqir said that previous policy measures include a cumulative 275 basis point increase in the policy rate, higher bank cash reserve requirements, regulatory tightening of consumer finance and curtailment of non-essential imports were supportive for lower inflation and keep the ongoing economic recovery sustainable.

Since the last meeting, held on 14th December 2021, several developments suggest that these demand-moderating measures are gaining traction and have improved the outlook for inflation, he said and added that recent economic growth indicators are appropriately moderating to a more sustainable pace.

While year-on-year headline inflation is high and will likely remain so in the near term due to base effects and energy prices, the momentum in inflation has slowed with month-on-month inflation flat in December compared to a significant rise of 3 percent in November. Inflation expectations of businesses have also declined considerably.

He said that the MPC will continue to carefully monitor developments affecting medium-term prospects for inflation, financial stability, and growth.

According to the Monetary Policy Statement issued by the SBP, the economic recovery underway over the last 18 months continues, with its pace moderating from a rebased estimate of 5.6 percent in FY21.

Since the last meeting, year-on-year growth rates of several high-frequency demand indicators either stabilized or slowed, including cement dispatches and sales of petroleum products, tractors and commercial vehicles.

On the supply side, LSM production decelerated to 3.3 percent (y/y) in July-November 2021, partly reflecting a high base-effect as well as higher input costs, while electricity generation stabilized.

Monetary policy: SBP raises key interest rate by 150 basis points, takes it to 8.75%

Similarly, there has been some easing in the momentum of imports and tax revenue growth. Prospects remain favorable in agriculture, with an improved Rabi crop outlook offsetting reports of lower cotton output.

According to SBP, overall, growth in FY22 is expected around the middle of the forecast range of 4-5 percent, slightly lower than previous expectations in light of moderating demand indicators and higher base effects from the upward revision in last year’s growth rate.

Risks to the outlook include, on the domestic front, the current growing Omicron wave and, on the external front, the possibility of faster than anticipated tightening by the US Federal Reserve and geopolitical events in Europe that may have implications for global financial conditions, it mentioned.

In the external sector, through the first half of FY22, the current account deficit has reached $9 billion. Based on PBS data, imports rose to $40.6 billion, up around 66 percent (y/y), with energy imports and Covid vaccines accounting for more than half the rise. Exports grew by nearly 25 percent (y/y) to reach $15.1 billion, buoyed by record-high shipments of textiles as well as strong rice exports.

Looking ahead, the current account deficit is expected to decline through the remainder of FY22, as import growth slows in response to a normalization of global commodity prices and the fuller impact of demand-moderating measures.

Indeed, the non-oil current account deficit is less than one-fourth the record levels reached during the first half of FY18. The current account projection is subject to risks on both sides.

On the one hand, the deficit could be larger if global commodity prices take longer to normalize. On the other hand, it could be smaller if the fiscal consolidation associated with the Finance (Supplementary) Act has a faster and more pronounced impact on demand.

During the first half of FY22, the FBR tax collections grew strongly by 32.5 percent, of which the fiscal deficit shrank to 1.1 percent of GDP during July-October FY22 from 1.7 percent. The primary surplus also improved by 0.1 percentage points to 0.4 percent of GDP.

Looking ahead, with the passage of the Finance (Supplementary) Act that withdraws certain tax exemptions, the fiscal deficit is projected to be around 0.5 percent of GDP lower than previously expected for FY22. Together with recent policy rate increases and accounting for the usual lagged impact of fiscal measures, this additional fiscal consolidation should help further moderate the pace of domestic demand growth, and thus improve the outlook for inflation and the current account in FY23.

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According to the statement, during the first half of FY22, private sector credit cumulatively grew by 13.4 percent, largely driven by increased demand for working capital loans especially by rice, textile, petroleum and steel industries.

Since the last MPC meeting, both short and long-term secondary market yields, benchmark rates and cut-off rates in the government’s auctions declined significantly, in line with the forward guidance provided by the MPC and the conduct of 2-month open market operations by the SBP.

Reuters adds: Central bank held its benchmark interest rate at 9.75% on Monday and signalled that borrowing costs would remain steady for now as recent tax increases were expected to curb demand and reduce the country’s budget deficit.

“There’s no need for further tightening at the moment because of the government’s fiscal policy,” State Bank of Pakistan Governor Reza Baqir told a news conference in Karachi.

He said a mid-year budget passed this month which ended exemptions on sales tax would reduce the fiscal deficit and moderate demand. Pakistan’s finance minister has said the tax changes would raise $1.9 billion.

“The MPC (Monetary Policy Committee) was of the view that current real interest rates on a forward-looking basis are appropriate to guide inflation to the medium-term range of 5%-7%, support growth, and maintain external stability,” the central bank said in statement announcing its rate decision. The bank also cut its projection for gross domestic product (GDP) for the 2022 financial year which ends on June 30 to about 4.5% from 5% previously. “If future data outturns require a fine-tuning of monetary policy settings, the MPC expected that any change would be relatively modest,” it said.

The governor said that while headline inflation would continue to remain high “in the near-term” due to elevated global commodity prices, its momentum was slowing. The central bank said inflation was expected to decline during the 2023 fiscal year towards its medium-term target faster than previously expected due to the government’s fiscal policy and a moderation in economic activity. The bank raised rates by 275 basis points between September and December to tackle a falling Pakistani rupee, high inflation and a current account deficit. It signalled in December it was probably close to being done with increases in the near-term.

Baqir also said that the current account deficit was stabilising and remained projected at about 4% of GDP.

Copyright Business Recorder, 2022

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