SBP Maintains Policy Rate Unchanged at 22%

In its recent meeting, the Monetary Policy Committee (MPC) decided to maintain the policy rate at 22 percent amid economic intricacies. Acknowledging the surge in gas prices impacting November’s inflation (29.2 percent y/y), the MPC tempers concerns with countervailing factors: a dip in international oil prices and enhanced agriculture produce availability.

Recent strides include finalizing an IMF SBA program review, poised to bolster financial inflows and fortify the State Bank of Pakistan’s FX reserves. Q1-FY24’s GDP growth aligns with MPC projections, indicating a moderate economic upturn. Consumer and business confidence also improve, but core inflation lingers at elevated levels.

The MPC asserts the appropriateness of the current monetary policy to meet the 5-7 percent inflation target by end-FY25, contingent on sustained fiscal consolidation and timely external inflows.

Examining the real sector, FY24’s GDP recovery is forecasted as moderate. Agriculture spearheads growth, manufacturing rebounds positively, while services languish. In the external sector, a commendable 65.9 percent y/y reduction in the current account deficit to $1.1 billion in Jul-Oct FY24 surfaces. Exports show promise, driven by food items, and remittances improve.

Fiscal indicators reveal sustained improvement; tax and non-tax revenues surge, with prudent expenditure management in Q1-FY24. The MPC underscores the imperative of persistent fiscal consolidation through broadening the tax base and curbing non-essential spending for macroeconomic stability.

Money and credit dynamics witness a slowdown, with broad money (M2) growth at 13.7 percent y/y by November 2023. Private sector credit retires, and commodity operations financing recedes seasonally. FX inflows in July elevate the Net Foreign Assets of the State Bank of Pakistan and the overall banking system, refining the compositional mix of broad money and reserve money.

Inflation remains a focal point, attributed to gas price hikes. Core inflation persists at 21.5 percent, marginally lower from its peak. Expectations from consumers and businesses, though improving, remain elevated. The MPC anticipates a substantial decline in headline inflation in H2-FY24 due to moderated demand, eased supply constraints, and international commodity price moderation.

In essence, the MPC treads cautiously, optimistic about economic recovery but advocating continuous fiscal prudence for sustained stability.