Market Divided on SBP’s Upcoming Monetary Policy Meeting

Market Divided on SBP’s Upcoming Monetary Policy Meeting

Karachi, July 20, 2023: Market participants are divided over the State Bank of Pakistan’s (SBP) decision on whether to raise the benchmark policy rate further in the upcoming monetary policy meeting.

A survey conducted by Arif Habib Limited revealed that 59.1 percent of participants believe the central bank will keep the policy rate unchanged at 22 percent, while the remaining 40.9 percent predict a 100 basis points increase in the policy rate.

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The SBP’s monetary policy committee is set to meet on July 31, 2023, and analysts at Arif Habib Limited expect the central bank to hold the policy rate at 22 percent in this meeting.

During its scheduled meeting on June 12, 2023, the SBP kept the policy rate unchanged. However, in an unexpected move, the central bank held an emergent meeting on June 26, 2023, and decided to increase the policy rate by 100 basis points to 22 percent. The decision was made to establish a positive real interest rate and serve as an anchor for managing and moderating inflation expectations, as cited by the SBP.

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The recent release of the country report by the International Monetary Fund (IMF) has added more focus on the upcoming SBP meeting. The IMF report emphasizes the importance of implementing a tighter monetary policy stance to address ongoing inflationary pressures and bring inflation back within the target range of 5-7 percent by the end of 2024-25. While the IMF acknowledges the recent policy rate increase as a positive step, it expects inflationary pressures to persist in the coming year.

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To re-anchor inflation expectations and achieve the desired results, the IMF suggests that the SBP needs to maintain its tightening cycle, using higher interest rates and prudent liquidity injections based on incoming data, as needed. The goal is to achieve real positive interest rates on a forward-looking basis and establish a clear downward path for both inflation and inflation expectations.

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Based on analysts’ projections, 2023-24 headline inflation is expected to be around 20.8 percent, which is lower than the IMF’s estimates of 25.9 percent. With these projections, real interest rates have already turned positive on a forward-looking basis. However, considering the higher inflation forecasts presented by the IMF, some market participants are anticipating the possibility of further interest rate increases in the upcoming monetary policy meeting.