Monetary policy: SBP holds interest rate at 22%

• MPC's decision is in line with market expectations.
• Interest rate unchanged for next one-and-half month.
• MPC says inflation rose in September 2023 as expected.

The State Bank of Pakistan (SBP) Monday decided to hold the key policy rate at 22%, in line with the market expectations, with the next announcement on December 12.

In a statement, the central bank said: "At its meeting today, the Monetary Policy Committee (MPC) decided to maintain the policy rate at 22 percent."

The committee noted that headline inflation rose in September 2023 (31.4%) as expected — a major factor in determining the key policy rate.

However, the SBP said, it is projected to decline in October and then maintain a downward trajectory, especially in the second half of the fiscal year.

The MPC expects inflation to decline significantly in October due to downward adjustments in fuel prices, easing prices of some major food commodities, and a favorable base effect. 

The central bank acknowledged that the recent volatility in global oil prices as well as the increase in gas tariffs from November pose some risks to the FY24 outlook for inflation and the current account.

"The committee also noted some offsetting factors: These include the targeted fiscal consolidation in Q1; improvement in market availability of key commodities; and the alignment of interbank and open market exchange rates."

The MPC noted four key developments since its September meeting —

• The initial estimates for Kharif crops are encouraging and will have positive effects on other key sectors of the economy.
• Second, the current account deficit narrowed considerably in August and September, which helped to stabilise the SBP’s FX reserves position amidst tepid external financing in these two months.
• Fiscal consolidation remained on track, with both fiscal and primary balances improving during Q1-FY24.
• While core inflation remains sticky, inflation expectations of both consumers and businesses improved in the latest pulse surveys.

The SBP said that in light of these developments, the MPC emphasised on continuing with the tight monetary policy stance.

The MPC, the statement mentioned, reiterated its earlier view that the real policy rate is significantly positive on a 12-month forward-looking basis and is appropriate to bring inflation down to the medium-term target of 5 – 7 percent by the end of FY25.

"However, the MPC noted that this outlook is based on continued fiscal consolidation and timely realization of planned external inflows," the central bank's statement added.

Since the last MPC meeting on September 14, when the interest rate was kept unchanged, several developments have taken place — the appreciation of rupee, decrease in petrol prices, expected inflation, decrease in the current account deficit and forex reserves.

Head of Equities at Intermarket Securities Raza Jafri told Geo.tv that the SBP was unlikely to rock the boat on the cusp of the International Monetary Fund (IMF) review and has unsurprisingly kept the policy rate unchanged at 22%.

However, he said, it does seem to be setting up grounds for interest rate cuts going forward, especially if the IMF review is successful and international oil prices remain under control.