The State Bank of Pakistan (SBP) has announced its decision to maintain the key policy rate at 22% in its most recent monetary policy committee (MPC) meeting.
This decision is being made amid ongoing IMF reviews and is influenced by various economic factors.
The SBP released a press statement outlining the MPC’s considerations. The committee acknowledged that headline inflation had risen in September 2023 as anticipated.
However, the central bank projected a decline in inflation for October and expected it to continue decreasing, particularly in the latter half of the fiscal year.
Several factors were taken into account by the committee. First, there have been recent fluctuations in global oil prices, and an increase in gas tariffs is expected to take effect in November 2023.
These factors introduce risks to the inflation outlook and the current account for fiscal year 2024. However, the MPC also noted some offsetting elements in the economic landscape.
These included targeted fiscal consolidation in the first quarter of the fiscal year, an improvement in the availability of essential commodities in the market, and efforts to align interbank and open market exchange rates.
The MPC highlighted key developments since its previous meeting in September. First, the initial estimates for Kharif crops showed promise, with positive ripple effects expected on various sectors of the economy. Second, the current account deficit had significantly narrowed in August and September, contributing to the stabilization of the SBP’s foreign exchange reserves, especially given the limited external financing during these two months.
Third, fiscal consolidation efforts remained on track, with both fiscal and primary balances improving in the first quarter of fiscal year 2024.
Lastly, while core inflation remained persistent, pulse surveys indicated improved inflation expectations among both consumers and businesses. However, the uncertain and volatile nature of global oil prices, exacerbated by conflicts in the Middle East, added an extra layer of uncertainty.
The MPC emphasized the importance of maintaining a tight monetary policy stance. They reiterated their belief that the real policy rate remains significantly positive when viewed from a 12-month forward-looking perspective.
This approach is considered appropriate to guide inflation towards the medium-term target of 5-7% by the conclusion of fiscal year 2025. The MPC did caution that this outlook is conditional on sustained fiscal consolidation efforts and the timely realization of planned external inflows.
This decision by the SBP is a critical one for Pakistan’s economic growth, financial stability, and inflation control. The SBP continues to closely monitor the evolving situation and stands ready to make data-driven policy adjustments as needed to ensure the country’s economic well-being.
