KARACHI: State Bank of Pakistan (SBP) on Monday raised benchmark policy rate by 100 points to 17 per cent to check inflationary pressure.
Addressing a press conference, SBP governor Jameel Ahmed said that the Monetary Policy Committee (MPC) decided to increase the policy rate by 100 basis points to 17 percent.
The committee noted that inflationary pressures are persisting and continue to be broad-based. If these remain unchecked, they could feed into higher inflation expectations over a longer-than-anticipated period.
“The MPC stressed that it is critical to anchor inflation expectations and achieve the objective of price stability to support sustainable growth in the future,” according to a statement released by the SBP.
Analysts at Topline Securities said that the decision was in line with broad market expectations. In a poll conducted by Topline Research, 37 per cent of the participants anticipated a 100 bps increase in policy rate. Similarly, as per monetary policy survey conducted by CFA society Pakistan, 63 per cent of the participants expected 100bps rise in policy rate.
Lately, uptick in secondary market bond yields & rising external account concerns had increased confusion and made some people believe that the policy rate would be increased by a higher percentage. However, the actual increase was largely in line with general market expectation. To recall, yields on 6-M T-Bill since last MPS on Nov 25, 2022 was up 200bps and rose by 82bps during the month of Jan. FX reserves since last MPS was also down by US$2.9 billion to US$4.6 billion, barely an import cover of 1-month.
SBP Governor highlighted three developments since last MPS that led to this decision which includes (1) core inflation has been increasing in the last 10-months and survey shows expectation of higher inflation, (2) lack of fresh financial inflows and ongoing debt repayments have led to a continuous drawdown in reserves, and (3) the global economic and financial conditions broadly remain uncertain in the near to short term, leading to mixed implications for the domestic economy.
Inflation expectations: SBP is of the view that inflation expectation have increased and there is upward risk to SBP’s inflation estimate hence increasing the policy rate was necessary to anchor inflation expectations and achieve medium term inflation target of 5-7 per cent by Dec-2024. SBP in its last MPS had stated that it expects inflation of 21-23 per cent. With expected adjustments in exchange rate, increase in PDL of Diesel, rise in gas and electricity prices, the analysts expect inflation to average 26 per cent in FY23, higher than SBP’s estimates.
The GDP growth to lower than initial estimates: As per monetary policy statement, sale volumes of automobiles, POL, and cement declined significantly in Dec-2022. On the production side, the large-scale manufacturing (LSM) output declined by 5.5 per cent in Nov-2022. Considering this, MPC is of the view that there is downside risk to GDP growth considering this situation.
SBP Governor in the analyst briefing also highlighted that at the start of FY23, financing requirement was around US$33 billion, which included US$10 billion of CAD and US$23 billion principal debt repayments. Now, due to import compression and better than expected CAD numbers of 1HFY23, CAD is likely to be below US$9 billion, lower than initially estimated US$10 billion. We believe that demand compression would be much pronounced and import restrictions could limit CAD to around US$6-8 billion in FY23 as per our estimate.
Out of the US$23 billion debt repayment, US$15 billion has already been settled as US$6 billion was rolled over and US$9 billion repayment was done. Out of the remaining US$8 billion, SBP is hopeful that rollover of around US$5 billion will be done and the actual repayment would be around US$3 billion for which financing would need to be arranged.
The analysts believe that given challenging global economic situation and delay in IMF program, rolling over debt would be challenge unless Pakistan swiftly completes reforms and get IMF on board.
SBP in its MPS highlighted the need the need of fiscal consolidation and the need for consistency between monetary and fiscal policy. As per the statement “The MPC noted that the current fiscal stance is inconsistent with monetary tightening. Thus, given the evolving macroeconomic challenges, it is important for the fiscal policy to achieve the planned consolidation in order to help contain inflation and pave the way for sustainable growth.”
SBP Governor highlighted that due to high CAD and delay in foreign inflows, there is a speculative element that had led to multiple exchange rate including that in black market. The Governor is hopeful that with revival of IMF program which is expected soon, the spread between interbank and open market rate will reduce and speculation element would also reduce.
The governor stated that the inquiry against banks is underway and a decision on the same will be made soon. The decision could either be in the form of regulatory fine or in the form of increased tax on FX income as banks made gross income of around Rs100 billion in 9M2022 as per the governor.