Contrary to market expectations, the Monetary Policy Committee of the State Bank of Pakistan (SBP) on Thursday kept the key policy rate unchanged at 22%.

“At its meeting today, the MPC decided to maintain the policy rate at 22%,” the SBP said in a statement.

“This decision takes into account the latest inflation outturn reflecting the continuing declining trend in inflation from its peak of 38% in May to 27.4% in August.

“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.

The MPC stressed on maintaining a prudent fiscal stance to keep aggregate demand in check. This is necessary to bring inflation down on a sustainable basis and to achieve the medium-term target of 5-7 percent by end-FY25: MPC 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.”

The MPC said it noted four key developments since its July meeting.

“First, agriculture outlook has improved, based on the latest data on cotton arrivals, better input conditions, and satellite data indicating healthy vegetation of other crops.

“Second, global oil prices have been rising and are now hovering over $90/barrel level.

“Third, as anticipated, the current account posted a deficit in July after remaining in surplus for the last four months, partly reflecting the impact of the recent ease in import restrictions.

“Finally, recent administrative and regulatory measures aimed at improving availability of essential food commodities and curbing illegal activities in the foreign exchange market have begun to yield results. This has helped in narrowing the gap between the interbank and open market exchange rates.”

The statement said the MPC will continue to monitor the risks to the inflation outlook and, if required, it will take appropriate action to achieve the objective of price stability.

“At the same time, the MPC also stressed on maintaining a prudent fiscal stance to keep aggregate demand in check. This is necessary to bring inflation down on a sustainable basis and to achieve the medium-term target of 5-7 percent by end-FY25.”

Background

Since the last MPC on July 31, when the MPC had also kept the policy rate unchanged at 22%, a number of key developments on the economic front took place.

The rupee depreciated nearly 4%, while petrol prices increased around 21% as well. Another hike in fuel prices is on the cards tonight as well.

The Consumer Price Index (CPI)-based inflation clocked in at 27.4% on a year-on-year basis in August 2023 as compared to an increase of 28.3% in the previous month and 27.3% in August 2022, according to the Pakistan Bureau of Statistics (PBS).

In addition, Pakistan’s current account posted a deficit of $809 million in July, the highest since October 2022, on account of rising imports after the government lifted import curbs while exports remained stagnant.

Foreign exchange reserves held by the central bank also declined and dropped below the $8 billion level.

As of September 01, 2023, foreign exchange reserves stood at $7.779 billion mainly due to external debt repayments, latest data showed.

What did analysts say?

Market experts Business Recorder reached out to earlier said they expected a rate hike as high as 300 basis points in the key policy rate on account of rising inflationary pressure.

“We foresee a 200bps increase in the policy rate to 24%,” Next Capital, a brokerage house, had said separately in a report released this week.

Next Capital cited reasons being expected pressure from the International Monetary Fund (IMF), and anchoring inflation expectations amidst increasing food and energy prices. It said effects of weakening domestic currency at the cost of already deteriorated outlook for growth and the fiscal strain due to increasing domestic debt servicing eating up the major revenues will also be triggers.

In its meeting on June 26, the MPC of the SBP had raised the key policy rate by 100 basis points (bps) to 22%, after convening an emergency meeting, to keep the real interest rate firmly in the positive territory on a forward-looking basis.

Back then, it said “certain upward revisions in taxes, duties and PDL rate in FY24 budget” and the SBP’s withdrawal of the general guidance for commercial banks on prioritisation of imports as having increased the “upside risks to the inflation outlook” for the rate-hike.

Following this, central bank decided to keep the policy rate unchanged at 22% in MPC on July 31.

It is pertinent to mention that as part of the IMF agreement, the government has committed to the Washington-based lender that it stands ready to consider further action in upcoming MPC meetings until inflation expectations are on a clear downward path.

However, despite securing a last-minute deal with the IMF, which initially provided massive relief to policymakers as well as the currency and stock markets, the economy remains engulfed with rising inflation and a widening current account deficit.