State bank keeps interest rate unchanged at 22%

• Inflation is projected to remain on the downward trajectory: MPC.
• Says it will continue to monitor the risks to the inflation outlook.
• Hopes the inflation will subsequently decline in month of October.

The State Bank of Pakistan (SBP) on Monday announced maintaining the key policy rate at 22%.

According to a statement issued by the central bank, the Monetary Policy Committee (MPC) decided to maintain the policy rate at 22%. 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 2023. 

The MPC — which was constituted as a statutory committee under the SPB Act — noted that 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 noted four key developments since its July meeting.

First, the agricultural 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 the 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 huddle also decided that it will continue to monitor the risks to the inflation outlook and, if required, take appropriate action to achieve the price stability objective. The MPC also stressed on maintaining a prudent fiscal stance to keep aggregate demand in check.

Real sector

The meeting noted that there is moderate pick up in sales of key inputs, like POL, fertilizer and cement, along with slight increase in import volumes. At the same time, with better input conditions and latest updates, the MPC noted that the outlook of the agriculture sector has improved.

Moreover, the committee assessed that domestic demand will also remain contained due to the unfolding 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.

External sector

The current account balance recorded a deficit of $809 million in July 2023 after posting surpluses in the preceding four months. This was largely in line with the earlier full-year current account projection for FY24, which already took into account the withdrawal of import prioritization guidelines and the resultant pickup in import volumes.

FBR’s revenues recorded a 27.2% increase

In the initial two months of FY24, FBR’s revenues recorded a 27.2% increase over the same period last year.

This improvement reflects the impact of both fiscal measures and some recovery in economic activity. The MPC views that achieving the targeted primary surplus of 0.4% of GDP is critical to support monetary policy in delivering on its objective of 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,” read the statement.

Money and credit

The latest data as of September 1 shows that broad money (M2) growth has decelerated to 13.6% on a year-on-year basis from 14.2% observed at end-June 2023, primarily driven by a significant slowdown in credit to the private sector. Similar to M2, growth in reserve money has also decelerated in FY24 so far. This trend mainly reflects the significant reduction in currency in circulation. 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 added.

'Inflation will subsequently decline in October'

It is pertinent to mention here that the national CPI inflation decelerated to 27.4% in August on y/y basis from 28.3% in July, with moderation in food inflation.

The meeting, however, noted that the decline in inflation was lower than anticipated largely due to the surge in global oil prices and their pass-through to administered energy prices. Also, as per latest surveys, near-term inflation expectations of both consumers and businesses have reversed from their earlier declining trend.

The committee noted that these results partly reflect the impact of heightened uncertainty in the FX markets – particularly in the open market – at the time these surveys were conducted.

In this context, the MPC noted the recent regulatory and law-enforcement measures will help address supply constraints in commodity and illegal activity in FX markets.

These developments – along with an improved agriculture outlook and tight monetary policy stance – will help ensure that inflation remains on a downward trajectory, especially from the second half of this year.

The MPC also noted that inflation is likely to increase significantly in September mainly due to the 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.