Karachi, September 14, 2023 – In a surprising move, the State Bank of Pakistan (SBP) announced on Thursday that it would maintain the benchmark policy rate at the existing level of 22 percent, contrary to various forecasts of an anticipated rate hike.
The decision was made by the Monetary Policy Committee (MPC) of the SBP, which cited four key developments since its last meeting in July:
Improved Agriculture Outlook: The MPC noted an improvement in the agriculture sector based on data indicating healthy conditions for crops such as cotton, better input availability, and satellite data showing robust vegetation in other crops.
Rising Global Oil Prices: Global oil prices have been steadily increasing and are currently hovering above $90 per barrel, posing a potential challenge to inflation.
Current Account Deficit: As anticipated, the current account, after posting surpluses for the past four months, recorded a deficit in July. This shift partly reflects the impact of eased import restrictions.
Efforts to Curb Currency Smuggling: Recent administrative and regulatory measures aimed at improving the availability of essential food commodities and curbing illegal activities in the foreign exchange market have started to show results. This has led to a reduction in the gap between the interbank and open market exchange rates.
The MPC emphasized its commitment to monitor inflation risks closely and take appropriate action if necessary to maintain price stability. Simultaneously, it stressed the importance of maintaining a prudent fiscal stance to control aggregate demand, aiming to bring inflation down to the medium-term target range of 5 – 7 percent by the end of fiscal year 2025.
High-frequency indicators show some improvement in economic activity, with moderate increases in the sales of key inputs like petroleum, fertilizer, and cement, as well as a slight uptick in import volumes. The outlook for the agriculture sector has also improved due to better input conditions and recent updates. The MPC expects domestic demand to remain contained, aligned with their earlier expectations of moderate growth this year.
The current account balance posted a deficit of $809 million in July 2023 after four consecutive surpluses. The MPC anticipates that overall imports will stay in check, supported by favorable trends in non-oil commodity prices, moderate domestic demand, and improved cotton production. Favorable rice prices and available surplus are positive signs for export prospects.
The Federal Board of Revenue (FBR) recorded a 27.2 percent increase in revenues in the initial two months of fiscal year 2024, driven by fiscal measures and some economic recovery. The MPC emphasized the importance of achieving the targeted primary surplus of 0.4 percent of GDP to support monetary policy in achieving price stability.
Broad money (M2) growth has decelerated to 13.6 percent year-on-year, primarily due to a slowdown in private sector credit. The MPC expects a moderate expansion in private sector credit in the coming year, supported by fiscal consolidation and increased economic activity.
Consumer Price Index (CPI) inflation eased to 27.4 percent in August, mainly due to a moderation in food inflation. However, it remained higher than expected due to rising global oil prices and their impact on energy prices. The MPC believes that inflation will remain on a downward trajectory, particularly in the second half of the year, supported by regulatory and law-enforcement measures to address supply constraints and illegal activity in the foreign exchange markets. Inflation is expected to rise temporarily in September due to base effects and energy price adjustments but is likely to decline thereafter.
The SBP’s decision to keep the benchmark policy rate unchanged reflects a cautious approach to addressing economic challenges while balancing inflation and growth considerations. The central bank remains committed to achieving its price stability objectives and ensuring the sustainability of economic growth.
