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Tag: Monetary Policy

  • Mini-budget likely to push up inflation: SBP

    Mini-budget likely to push up inflation: SBP

    KARACHI: The State Bank of Pakistan (SBP) on Monday said that inflation likely to increase due to cost-push pressure from removal of exemptions in the mini-budget and rise in energy tariff.

    “Together with low base effects, one-off cost-push pressures from energy tariff increases and the removal of tax exemptions in the Finance (Supplementary) Act are likely to keep year-on-year inflation elevated over the next few months, close to the upper end of the average inflation forecast of 9-11 percent in FY22,” the SBP said while announcing monetary policy for next two months.

    The government presented the mini-budget on December 30, 2021. The Finance (Supplementary) Act, 2022 was implemented last week as the ministers of the government repeatedly claimed that removal of exemptions would not affect the lower income group.

    READ MORE: Tax imposed to protect domestic entertainment industry

    The SBP said that during FY23, inflation is expected to decline toward the medium-term target range of 5-7 percent more quickly than previously forecasted as demand-side pressures wane faster due to the Finance (Supplementary) Act and recent moderation in economic activity indicators.

    While headline and core inflation rose in December, both the sequential momentum of inflation and inflation expectations of businesses fell significantly.

    “At today’s meeting, the Monetary Policy Committee (MPC) decided to maintain the policy rate at 9.75 per cent, in line with the forward guidance provided in the last monetary policy statement,” the SBP added.

    At that time, the MPC had considered the measures taken to lower inflation and keep the ongoing economic recovery sustainable.

    READ MORE: FBR slaps sales tax at 17% on supply of food stuff

    These measures include a cumulative 275 basis point increase in the policy rate, higher bank cash reserve requirements, regulatory tightening of consumer finance, and curtailment of non-essential imports.

    Since the last meeting on 14th December 2021, several developments suggest that these demand-moderating measures are gaining traction and have improved the outlook for inflation. Recent economic growth indicators are appropriately moderating to a more sustainable pace.

    While year-on-year headline inflation is high and will likely remain so in the near term due to base effects and energy prices, the momentum in inflation has slowed with month-on-month inflation flat in December compared to a significant rise of 3 percent in November.

    READ MORE; FBR enhances tax rates on motor vehicle registration

    Inflation expectations of businesses have also declined considerably. The current account deficit appears to have stopped growing since November and the non-oil current account balance is expected to achieve a small surplus for FY22.

    Finally, and importantly, the enactment of the recent Finance (Supplementary) Act, 2022 represents significant additional fiscal consolidation compared to the budget and has lowered the outlook for inflation in FY23.

    Looking ahead, and against the backdrop of these developments that have improved the inflation outlook, the MPC was of the view that current real interest rates on a forward-looking basis are appropriate to guide inflation to the medium-term range of 5-7 percent, support growth, and maintain external stability. If future data outturns require a fine-tuning of monetary policy settings, the MPC expected that any change would be relatively modest.

    In reaching its decision, the MPC considered key trends and prospects in the real, external and fiscal sectors, and the resulting outlook for monetary conditions and inflation.

    READ MORE: FBR increases income tax to 15% on cellular services

    The economic recovery underway over the last 18 months continues, with its pace moderating from a rebased estimate of 5.6 percent in FY21. Since the last meeting, year-on-year growth rates of several high-frequency demand indicators either stabilized or slowed, including cement dispatches and sales of petroleum products, tractors and commercial vehicles. On the supply side, LSM production decelerated to 3.3 percent (y/y) in July-November 2021, partly reflecting a high base-effect as well as higher input costs, while electricity generation stabilized. Similarly, there has been some easing in the momentum of imports and tax revenue growth. Prospects remain favourable in agriculture, with an improved Rabi crop outlook offsetting reports of lower cotton output. Overall, growth in FY22 is expected around the middle of the forecast range of 4-5 percent, slightly lower than previous expectations in light of moderating demand indicators and higher base effects from the upward revision in last year’s growth rate. Risks to the outlook include, on the domestic front, the current growing Omicron wave and, on the external front, the possibility of faster than anticipated tightening by the US Federal Reserve and geopolitical events in Europe that may have implications for global financial conditions.

    Through the first half of FY22, the current account deficit has reached $9 billion. Based on PBS data, imports rose to $40.6 billion, up around 66 percent (y/y), with energy imports and Covid vaccines accounting for more than half the rise. Encouragingly, imports excluding energy and vaccines have stabilized in the last two months. Exports grew by nearly 25 percent (y/y) to reach $15.1 billion, buoyed by record-high shipments of textiles as well as strong rice exports. Meanwhile, remittances rose by 11.3 percent (y/y) to an all-time high of $15.8 billion during the first half of the fiscal year. Looking ahead, the current account deficit is expected to decline through the remainder of FY22, as import growth slows in response to a normalization of global commodity prices and the fuller impact of demand-moderating measures. Indeed, the non-oil current account deficit is less than one-fourth the record levels reached during the first half of FY18. The current account projection is subject to risks on both sides. On the one hand, the deficit could be larger if global commodity prices take longer to normalize. On the other, it could be smaller if the fiscal consolidation associated with the Finance (Supplementary) Act has a faster and more pronounced impact on demand.

    READ MORE: FBR issues new FED rates on motor vehicles

    During the first half of FY22, FBR tax collections grew strongly by 32.5 percent (y/y). As a result, the fiscal deficit shrank to 1.1 percent of GDP during July-October FY22, compared to 1.7 percent of GDP during the same period last year. The primary surplus also improved by 0.1 percentage points to 0.4 percent of GDP. Looking ahead, with the passage of the Finance (Supplementary) Act that withdraws certain tax exemptions, the fiscal deficit is projected to be around 0.5 percent of GDP lower than previously expected for FY22. Together with recent policy rate increases and accounting for the usual lagged impact of fiscal measures, this additional fiscal consolidation should help further moderate the pace of domestic demand growth, and thus improve the outlook for inflation and the current account in FY23.

    During the first half of FY22, private sector credit cumulatively grew by 13.4 percent, largely driven by increased demand for working capital loans especially by rice, textile, petroleum and steel industries. Since the last meeting, both short and long-term secondary market yields, benchmark rates and cut-off rates in the government’s auctions declined significantly, in line with the forward guidance provided by the MPC and the conduct of 2-month open market operations by the SBP.

  • Employers criticize increase in key policy rate

    Employers criticize increase in key policy rate

    Karachi: Employers have strongly criticized the State Bank of Pakistan (SBP) for recent increase in policy rate amid rising inflation.

    (more…)
  • Stocks end up 370 points in late hours buying

    Stocks end up 370 points in late hours buying

    KARACHI: Stocks ended up by 370 points on Tuesday owing to late hours buying before the closing.

    The benchmark KSE-100 index of Pakistan Stock Exchange (PSX) ended at 43.247 points from the previous day’s closing of 42,876 points.

    Analysts at Topline Securities said that it was a lacklustre day at PSX today where KSE-100 Index initially opened in a negative territory and remained sideways most of the day ahead of the Monetary Policy Announcement as scheduled in the evening.

    However, investors opted for value hunting across the board during the last trading hours.

    During the day, market made an intraday high at 43,266 level (up 389 points; +0.91 per cent) and low at 42,715 level (down 161 points; -0.38 per cent) before closing at 43,247 level (up 370 points; +0.86 per cent).

    Technology, Cements, E&P and Food sector’s stocks led the show where TRG, MLCF, LUCK, MARI and UNITY cumulatively added 161 points while OGDC, SNGP & ABL were major laggards as they lost 38 points, collectively.

    Total volume and value stood at 212 million shares & Rs6.8 billion, respectively. WTL was at top on the volume chart with 21 million shares traded in it, today.

    Stocks fall by 519 points on policy tightening concerns
  • Key policy rate goes up to 9.75%; SBP raises 250bps in less than month

    Key policy rate goes up to 9.75%; SBP raises 250bps in less than month

    KARACHI: The State Bank of Pakistan (SBP) on Tuesday increased the key policy rate by 100 basis points to 9.75 per cent. The decision was as per expectations of the market.

    This is the second increase in policy rate in less than a month. The SBP on November increased the policy rate by 150 basis points to 8.75 per cent. Cumulatively, the central bank enhanced the policy rate by 250 basis points in less than a month.

    READ MORE: SBP increases policy rate by 150 basis points to 8.75%

    The SBP issued the statement that the Monetary Policy Committee (MPC) decided to raise the policy rate by 100 basis points to 9.75 percent.

    “The goal of this decision is to counter inflationary pressures and ensure that growth remains sustainable,” the SBP said.

    Since the last meeting on November 19, 2021, indicators of activity have remained robust while inflation and the trade deficit have risen further due to both high global prices and domestic economic growth.

    In November, headline inflation increased to 11.5 percent (y/y). Core inflation in urban and rural areas also rose to 7.6 and 8.2 percent, respectively, reflecting domestic demand growth. On the external side, despite record exports, high global commodity prices contributed to a significant increase in the import bill.

    As a result, the November trade deficit rose to $5 billion based on PBS data.

    The MPC noted that recent data releases confirm that the emphasis of monetary policy on moderating inflation and the current account deficit remains appropriate.

    Following today’s rate increase and given the current outlook for the economy, and in particular for inflation and the current account, the MPC felt that the end goal of mildly positive real interest rates on a forward-looking basis was now close to being achieved.

    Looking ahead, the MPC expects monetary policy settings to remain broadly unchanged in the near-term.

    In reaching its decision, the MPC considered key trends and prospects in the real, external and fiscal sectors, and the resulting outlook for monetary conditions and inflation.

    High-frequency indicators of domestic demand released since the last meeting, including electricity generation, cement dispatches, and sales of fast-moving consumer goods and petroleum products, and continued strength in imports and tax revenues suggest that economic growth remains robust. The outlook for agriculture continues to be strong, supported by better seed availability and an expected increase in the area under wheat cultivation.

    Meanwhile, robust growth in sales tax on services also suggests that the tertiary sector is recovering well. While some activity indicators are moderating on a sequential basis, partly as a result of recent policy actions to restrain domestic demand, growth this fiscal year is expected to be close to the upper end of the forecast range of 4-5 percent.

    This projection factors in the expected impact of today’s interest rate decision. The emergence of the new Coronavirus variant, Omicron, poses some concerns, but at this stage there is limited information about its severity.

    The MPC noted that Pakistan had successfully coped with multiple waves of the virus, which supported a positive outlook for the economy.

    READ MORE: SBP not to hold regular monetary policy committee meeting

    Despite strong exports and remittances, the current account deficit has increased sharply this year due to a rise in imports, and recent outturns have been higher than earlier expected. Based on PBS data, imports rose to $32.9 billion during July-November FY22, compared to $19.5 billion during the same period last year.

    Around 70 percent of this increase in imports stems from the sharp rise in global commodity prices, while the rest is attributable to stronger domestic demand. Due to the higher recent outturns, the current account deficit is projected at around 4 percent of GDP, somewhat higher than earlier projected.

    While in the near term monthly current account and trade deficit figures are likely to remain high, they are expected to gradually moderate in the second half of FY22 as global prices normalize with the easing of supply disruptions and tightening of monetary policy by major central banks. In addition, recent policy actions to moderate domestic demand―including policy rate hikes and curbs on consumer finance―and proposed fiscal measures, should help moderate growth in import volumes through the rest of the year.

    In this context, the MPC emphasized that the monetary policy response to arrest the deterioration in the current account deficit has been timely.

    Together with the natural moderating influence of the flexible and market-determined exchange rate, the MPC felt that this response would help achieve the goal of a sustainable current account deficit this fiscal year. Moreover, the MPC noted that the current account deficit is expected to be fully financed from external inflows.

    READ MORE: SBP issues annual schedule for monetary policy

    As a result, foreign exchange reserves should remain at adequate levels through the rest of the fiscal year and resume their growth trajectory as global commodity prices ease and import demand moderates.

    During July-November FY22, fiscal revenue growth has been strong, driven by a broad-based and above-target increase in FBR tax collections (36.5 percent (y/y)).

    However, lower petroleum development levy (PDL) collection led to a decline in non-tax revenues (22.6 percent (y/y) in Q1 FY22). On the expenditure side, development spending and subsidies and grants have increased significantly during this period.

    The government intends to introduce legislation to increase revenues through elimination of certain tax exemptions and reduce current and development expenditures. These measures would help moderate domestic demand, improve the current account outlook, and complement recent monetary policy actions.

    READ MORE: SBP decides early announcement of monetary policy

    Since the last meeting, despite a moderation in consumer loans, overall credit growth has remained supportive of growth. Meanwhile, across all tenors, secondary market yields, benchmark rates and cut-off rates in the government’s auctions have risen significantly. The MPC noted that this increase appeared unwarranted.

    The momentum in inflation has continued since the last MPC meeting, as reflected in a significant increase in both headline and core inflation in November. Due to recent higher than expected outturns, SBP expects inflation to average 9 – 11 percent this fiscal year.

    The pick-up in inflation has been broad-based, with electricity charges, motor fuel, house rent, milk and vegetable ghee among the largest contributors.

    READ MORE: SBP issues clarification on monetary policy decision

    On a sequential basis, inflation rose 3 percent (m/m) in November. Looking ahead, based on this momentum and the expected path of energy tariffs, inflation is likely to remain within the revised forecast range for the remainder of the fiscal year.

    Subsequently, as global commodity prices retrench, administered price increases dissipate, and the impact of demand-moderating policies materializes, inflation is expected to decline toward the medium-term target range of 5-7 percent during FY23. The MPC will continue to carefully monitor developments affecting medium-term prospects for inflation, financial stability and growth.

  • SBP issues clarification on monetary policy decision

    SBP issues clarification on monetary policy decision

    KARACHI: The State Bank of Pakistan (SBP) on Monday issued a clarification on media reports regarding the monetary policy decisions.

    The SBP said that over the past few weeks, certain sections of the media including op-eds have expressed concerns over the actions of the SBP, particularly with regard to monetary policy decisions and the role of the Covid-related monetary accommodation in fueling the currently elevated inflation outturns.

    The SBP would like to address these concerns and offer some clarifications.

    First, while referencing the status quo monetary policy decisions in the earlier half of 2021, certain op-ed have implied that the central bank had absolved itself of its responsibility to combat inflation when it was rising.

    Such points are all easier made in hindsight but let us remind ourselves what the situation was actually like back in May and July 2021. Demand-side pressures appeared contained with spare capacity in the economy, price pressures were concentrated in a few items, wage growth was subdued and inflation expectations were reasonably anchored.

    Moreover, any inflationary concerns were dwarfed by the fact that Pakistan was going through the 3rd and subsequently the more virulent and uncertain 4th Delta-variant wave of Covid-19. There were a few occasions when micro lockdowns were imposed, while the vaccine rollout was not as extensive as it is currently.

    Globally as well, Covid cases were spiraling upwards, driven primarily by the Delta variant. At such a time of elevated uncertainty about the future trajectory of the pandemic, the Monetary Policy Committee adopted a prudent policy stance by keeping interest rates unchanged, so as to not preemptively disrupt economic activity.

    It is quite easy, in hindsight, to criticize this decision even though no tangible alternatives were proposed in the op-eds or elsewhere at the time.

    By contrast, policymaking involves taking calculated decisions in real-time, when the future is uncertain and considerations need to be carefully balanced. This is especially so in the face of a shock like Covid, for which policymakers have no rulebook.

    Second, in the midst of a once-in-a-century pandemic, it would be imprudent to solely superimpose classical economic theories onto data outturns.

    Policymakers, economists and businesses around the world did not know how the global or domestic economy would evolve in response to mobility restrictions of varying stringencies in different locations.

    Similarly, there was, and in fact continues to be, heightened uncertainty regarding price-setting behavior. For instance, there is an on-going debate in global policy circles and financial markets over whether the ongoing bout of inflation is transitory in nature or not. In the face of an unprecedented shock like Covid, invoking supposed historical, text-book patterns of overheating, as in the op-ed, is facile.

    Under such circumstances, as policymakers around the world acknowledged, the costs of normalizing policies too soon outweigh those of waiting for more clarity on the path of inflation and output.

    As that uncertainty has recently waned in Pakistan, monetary policy is being appropriately normalized.

    Third, some commentary has seemingly attributed the currently higher inflation to the growth in broad money supply.

    In this regard, the SBP would like to point out that at the start of the pandemic in March 2020 and for the subsequent few months, real broad money balances were in fact below the pre-Covid trend. If allowed to continue, a liquidity crisis would have turned into a solvency one, multiplying the contractionary impact of Covid-19 on real GDP growth.

    To stave off this stark outcome, and to extend the needed support to businesses and households, the SBP and the government introduced unprecedented stimulative policy measures.

    As a consequence, real money balances recovered as intended. Not providing this support would have risked worsening and prolonging the loss in output and employment that accompanied the Covid shock.

    Lastly, the SBP would like to reiterate that its policy stance is geared towards price stability, while playing its due role in contributing to economic growth and development.

    Getting this balance right through the various stages following Covid has been the key goal of monetary policy, and helps explain the path of policy actions.

    SBP signs $3bn deposit agreement with Saudi Fund
  • State Bank enhances frequency of MP reviews to eight

    State Bank enhances frequency of MP reviews to eight

    KARACHI: State Bank of Pakistan (SBP) on Friday decided to increase the frequency of monetary policy reviews to eight in a year instead of the existing six reviews.

    In continuation of efforts to make the process of monetary policy formulation more predictable and transparent in line with international best practices, the SBP decided to increase the frequency of monetary policy reviews from six (6) to eight (8) times a year.

    This action will bring the frequency of meetings in line with that incomparable emerging markets. It will also help to enhance the predictability of monetary policy actions, the SBP added.

    Accordingly, the schedule for the next five MPC meetings is as follows:

    1. December MPC meeting: Tuesday, 14th Dec 2021

    2. January MPC meeting: Monday, 24th Jan 2022

    3. March MPC meeting: Tuesday, 8th Mar 2022

    4. April MPC meeting: Tuesday, 19th Apr 2022

    5. June MPC meeting: Friday, 10th Jun 2022

    The advance calendar for the next half-year of MPC meetings will be shared at the time of the June 2022 MPC meeting, the SBP added.

    SBP increases policy rate by 150 basis points to 8.75%
  • SBP increases policy rate by 150 basis points to 8.75%

    SBP increases policy rate by 150 basis points to 8.75%

    KARACHI: The State Bank of Pakistan (SBP) on Friday decided to increase the key policy rate by 150 basis points to 8.75 per cent for next two months from the existing 7.25 per cent.

    At today’s meeting, the Monetary Policy Committee (MPC) decided to raise the policy rate by 150 basis points to 8.75 percent. This reflected the MPC’s view that since the last meeting, risks related to inflation and the balance of payments have increased while the outlook for growth has continued to improve, the SBP said.

    The heightened risks related to inflation and balance of payments stem from both global and domestic factors. Across the world, price pressures from Covid-induced disruptions to supply chains and higher energy prices are proving to be larger and longer-lasting than previously anticipated.

    In response, central banks have generally begun to tighten monetary policy to keep inflation expectations anchored. In Pakistan too, high import prices have contributed to higher-than-expected CPI, SPI, and core inflation outturns.

    At the same time, there are also emerging signs of demand-side pressures on inflation, and inflation expectations of businesses have risen on account of further upside risks from domestic administered prices.

    With respect to the balance of payments, the current account deficits in September and October have been larger than anticipated, reflecting both rising oil and commodity prices and buoyant domestic demand. The burden of adjusting to these external pressures has largely fallen on the rupee.

    As a result of these developments, the balance of risks has shifted away from growth and toward inflation and the current account faster than expected. Accordingly, the MPC was of the view that there is now a need to proceed faster to normalize monetary policy to counter inflationary pressures and preserve stability with growth.

    Today’s rate increase is a material move in this direction. Looking ahead, the MPC reiterated that the end goal of mildly positive real interest rates remains unchanged and, given today’s move, expects to take measured steps to that end.

    In reaching its decision, the MPC considered key trends and prospects in the real, external and fiscal sectors, and the resulting outlook for monetary conditions and inflation.

    The economic recovery underway since the start of FY21 continues, as reflected in most high-frequency indicators of domestic demand―including automobile sales, POL (petroleum, oil and lubricants) sales, and electricity generation―as well as the strength of imports and tax revenues.

    Notwithstanding some moderation in September due to a high base effect and some supply chain disruptions, LSM registered broad-based growth of 5.2 percent (y/y) in Q1-FY22, led by production of consumer goods (both durable and non-durable), construction-allied, and export industries.

    In agriculture, production levels of all major Kharif crops except cotton are estimated to have reached all-time highs. Cotton production has also rebounded, with arrivals at ginneries growing by 80 percent as of 1st November compared to the same period last season. Overall, the economic recovery appears increasingly durable and self-sustaining, against the backdrop of rapidly falling Covid cases and the government’s vigorous vaccination roll-out.

    Looking ahead, rising input costs and normalization of macroeconomic policies are likely to lead to some moderation in the growth of industrial activity. Nevertheless, this could be more than offset by the improved outlook for agriculture, such that risks to the growth forecast of 4-5 percent in FY22 are tilted to the upside.

    Persistently high international commodity prices and strong domestic activity kept the current account deficit elevated at $3.4 billion in Q1-FY22.

    The deficit widened to$1.66 billion in October from $1.13 billion in September due to high energy prices and an uptick in services imports, despite some moderation in non-energy imports. There was also a moderate month-on-month decline in exports and remittances.

    The current account deficit for FY22 is expected to modestly exceed the previous forecast of 2-3 percent of GDP.

    While the market-based exchange rate has played its due role as a shock absorber, it has borne a considerable burden in terms of adjusting to the widening current account deficit. The rupee has depreciated by a further 3.4 percent since the last MPC meeting. The US dollar also appreciated against most emerging market currencies since May as expectations of tapering by the Federal Reserve have been brought forward. However, the fall in the value of the rupee since May has been comparatively large. As other adjustment tools normalize, including interest rates and fiscal policy, pressures on the rupee should abate.

    The overall fiscal deficit improved to 0.8 percent of GDP in Q1-FY22 from 1 percent in the same period last year. This was driven by the above-target growth in FBR tax revenues (38.3 percent (y/y)) despite higher refunds and a significant reduction in the sales tax rate on POL. However, non-tax revenue fell by 22.6 percent (y/y) due to a sharp decline in petroleum development levy (PDL) collection. In addition, the primary surplus was 28.6 percent lower than in Q1-FY21, due to a 33 percent (y/y) growth in non-interest spending. Looking ahead, it will be important to achieve the fiscal consolidation plan in the budget to help restrain domestic demand. A higher-than-planned primary fiscal deficit would likely worsen the outlook for inflation and the current account and would undermine the durability of the recovery.

    Real money supply growth has accelerated in recent months to above-trend levels.  With the economic recovery on a sound footing, there is a need to pare back this growth as part of the broader move toward normalizing monetary conditions. The MPC noted that the recent increase in banks’ cash reserve requirements would help in this regard.

    Inflationary pressures have increased considerably since the last MPC meeting, with headline inflation rising from 8.4 percent (y/y) in August to 9 percent in September and further to 9.2 percent in October, mainly driven by higher energy costs and a rise in core inflation.

    The momentum of inflation has also picked up significantly, with average m/m inflation in the last two months at an elevated 2 percent and all sub-components of the CPI basket showing an acceleration. Core inflation has also picked up in the last two months, rising to 6.7 percent (y/y) in both urban and rural areas on the back of house rents, cloth and garments, medicines, footwear, and other components.

    In addition, inflation expectations of households remain elevated and those of businesses have risen sharply. Looking ahead, global commodity prices and potential further upward adjustments in administered prices of energy pose upside risks to the average inflation forecast of 7-9 percent in FY22.

    The MPC will continue to carefully monitor developments affecting medium-term prospects for inflation, financial stability and growth and stands ready to respond appropriately.

    SBP decides early announcement of monetary policy
  • Key policy rate may up by 100bps in hawkish stance

    Key policy rate may up by 100bps in hawkish stance

    KARACHI: The State Bank of Pakistan (SBP) is set to announce monetary policy on November 19, 2021 and analysts believe the central bank may remain hawkish.

    Analysts at Arif Habib Limited said that the monetary policy committee of SBP will convene on Friday, November 19, 2021 to announce the monetary policy for the next two months.

    The analysts expect that SBP to remain hawkish, raising its policy rate for the second time since the beginning of the current fiscal year 2021/2022 and at a much higher magnitude of 100 basis points – the highest hike in almost 2.3 years – taking the total cumulative increase in FY22TD to 125bps. With this, the revised policy rate is expected at 8.25 per cent.

    To recall, the SBP, continuing with its tightening policy, recently announced a 100bps hike in Cash Reserve Requirement too.

    A shift towards ‘a more hawkish stance’ from the earlier ‘gradual and calibrated’ might be evident in this monetary policy meeting as inflation worries are rumbling more clearly than before.

    Inflation in Pakistan has increased markedly with the resumption of economic activities – but as supply-side inflation has subsided, demand-side inflation has overshot.

    Headline inflation initially remained low averaging at 8.7 per cent during the first four months of the fiscal year 2021/2022, but now with waning base effect, it has started accelerating, raising concerns.

    Clearly, the inflationary pressures reflect the upside arising in global energy and commodity prices and moreover, do not look ready to subside anytime soon.

    We have seen some of the central banks in the regional markets reacting as consumer prices are being pressured by global supply-chain disruptions and costlier energy and food supplies.

    Domestically, there has been a positive development on the COVID front, in terms of reduced infections/deaths and faster vaccinations.

    The overall improved healthcare conditions coupled with the economic performance of high-frequency indicators (such as auto and cement sales) as well as LSM numbers (2MFY22: +7.3% YoY) evidently signal that the overall economic activity is on the cusp of a strengthening revival.

    The domestic recovery that is likely to push GDP growth higher than initially anticipated is adding to inflationary pressures and thus, the prudent policy approach for the SBP would be to tack in a more hawkish path to manage these risks.

    SBP decides early announcement of monetary policy
  • SBP decides early announcement of monetary policy

    SBP decides early announcement of monetary policy

    KARACHI: The State Bank of Pakistan (SBP) has altered its monetary policy announcement date, advancing it to November 19, 2021, from the initially scheduled date of November 26, 2021.

    (more…)
  • SBP announces first policy rate increase in 26 months

    SBP announces first policy rate increase in 26 months

    KARACHI: The State Bank of Pakistan (SBP) on Monday announced first increase in key policy rate by 25 basis points in past 25 months.

    Previously, the SBP announced the increase in policy rate of 100 basis points to 13.25 per cent.

    The SBP kept the policy rate unchanged at 13.25 per cent till March 17, 2020 when it decided to reduce the policy rate by 75 per cent to 12.50 per cent.

    Due to coronavirus pandemic, the central bank brought down the policy rate to 7 per cent in short span of time and maintained at this level for the past many months. The SBP reduced the policy rate to 7 per cent in its announcement on June 25, 2020.

    At its meeting on September 20, 2021, the Monetary Policy Committee (MPC) decided to raise the policy rate by 25 basis points to 7.25 percent.

    Since its last meeting in July, the MPC noted that the pace of the economic recovery has exceeded expectations.

    This robust recovery in domestic demand, coupled with higher international commodity prices, is leading to a strong pick-up in imports and a rise in the current account deficit.

    While year-on-year inflation has declined since June, rising demand pressures together with higher imported inflation could begin to manifest in inflation readings later in the fiscal year.

    With growing signs that the latest COVID wave in Pakistan remains contained, continued progress in vaccination, and overall deft management of the pandemic by the government, the economic recovery now appears less vulnerable to pandemic-related uncertainty.

    As a result, at this more mature stage of the recovery, a greater emphasis is needed on ensuring the appropriate policy mix to protect the longevity of growth, keep inflation expectations anchored, and slow the growth in the current account deficit.

    In line with this shift in the economic outlook, the MPC was of the view that the priority of monetary policy also needed to gradually pivot from catalyzing the recovery after the Covid shock toward sustaining it.

    As foreshadowed in previous monetary policy statements, the MPC noted that this rebalancing would be best achieved by gradually tapering the significant monetary stimulus provided over the last 18 months.

    The MPC noted that over the last few months the burden of adjusting to the rising current account deficit had fallen primarily on the exchange rate and it was appropriate for other adjustment tools, including interest rates, to also play their due role.

    The MPC noted that the stance of monetary policy is still appropriately supportive of growth, with real interest rates remaining negative on a forward-looking basis. Looking ahead, in the absence of unforeseen circumstances, the MPC expects monetary policy to remain accommodative in the near term, with possible further gradual tapering of stimulus to achieve mildly positive real interest rates over time.

    The pace of this possible further gradual tapering would be informed by updated information on the continued strength of demand growth and the stance of fiscal policy, amongst other factors.

    In reaching its decision, the MPC considered key trends and prospects in the real, external and fiscal sectors, and the resulting outlook for monetary conditions and inflation.

    With a supportiveFY22 budget and accommodative monetary policy, most high-frequency domestic demand indicators such as automobiles, POL (petroleum, oil and lubricants) sales, cement sales and electricity generation continue to depict robust growth. This growth is mirrored in the strength of imports and tax collections.

    LSM registered strong growth in June (18.5 percent (y/y)) before moderating in August to 2.2 percent (y/y), in line with typical seasonal patterns. The services sector is also rebounding strongly; latest Google Community Mobility Reports show that activity across grocery stores, restaurants, and shopping centers during July and August rose above pre-Covid levels. In agriculture, the decline in the area under cultivation of cotton is expected to be compensated by an increase in area for rice, maize, and sugarcane. Based on these trends, growth in FY22 is now expected toward the upper end of the forecast range of 4-5 percent, notwithstanding some greater uncertainty with respect to spillovers from the evolving situation in Afghanistan.

    The current account deficit rose to $0.8 billion in July and $1.5 billion in August, reflecting both vigorous domestic demand and high global commodity prices. While remittances remained strong, growing by 10.4 percent (y/y) during July-August and exports also performed reasonably well (averaging $2.3 billion per month), they were outstripped by imports. In response, the rupee depreciated by 4.1 percent since the last MPC meeting. The MPC noted that many other currencies have also depreciated recently as expectations of tapering by the Federal Reserve have been brought forward.

    The MPC noted that the flexible market-based exchange rate regime has performed well since its introduction in June 2019, including through the Covid shock. It has overseen a healthy modulation of the current account and supported a critical build-up in the country’s gross and net FX reserves despite external pressures. Under this regime, the SBP does not suppress an underlying trend in the exchange rate and any interventions are limited to address disorderly market conditions. Since its floatation, the rupee has moved in an orderly manner in both directions and has depreciated by only 4.8 percent to date, much less than many other emerging market currencies over the same period. Since the rupee was floated, SBP’s gross foreign exchange reserves have nearly tripled to a record $20 billion, while net international reserves have risen by nearly $16 billion between end-June 2019 and end-August 2021.

    The MPC observed that while the flexible exchange rate has appropriately played its role as a shock absorber, it is important that its role be complemented by strong exports, targeted measures to curb non-essential imports, and appropriate macroeconomic policy settings to contain import growth.

    In FY21, prudent management of the public finances facilitated fiscal consolidation for the second year in a row despite Covid, with the primary deficit declining by around ½ percentage points to 1.4 percent of GDP. This improvement largely stemmed from strong growth in tax and petroleum development levy (PDL) revenues, together with significant deceleration in non-interest expenditures. Following the seasonal end-year release of expenditure allocations, the fiscal impulse was strongly expansionary in the final quarter of FY21. In the first two months of FY22, FBR revenue grew by over 40 percent (y/y)while Federal PSDP releases rose to an all-time high for this period, equivalent to nearly 44 percent of their budgeted amount for the full year. It will be important to support tax revenue growth and carefully monitor outturns through the year to ensure the budget remains on track. Any unforeseen slippages in the fiscal stance would further bolster domestic demand, imports and inflation.

    The MPC noted that accommodative financial conditions have provided significant support to the growth recovery since the start of FY21. Following historic cuts in the policy rate and the introduction of SBP Covid-related support packages, private sector credit grew by more than 11 percent during FY21, on the back of consumer loans (mainly auto finance and personal loans) followed by a broad-based expansion in credit for fixed investment and finally working capital loans. The MPC felt that some macro prudential tightening of consumer finance may also be appropriate to moderate demand growth as part of the move toward gradually normalizing monetary conditions.

    Inflation fell from 9.7 percent (y/y) in June to 8.4 percent in both July and August. In addition to favorable base effects, this decline reflects continued deceleration in administered prices of energy due to the reduction in PDL and sales tax on petroleum products. Core inflation also fell in both urban and rural areas in August. Nevertheless, the momentum of prices remains relatively elevated, with month-on-month increases of 1.3 percent in July and 0.6 percent in August. In addition, inflation expectations of both households and businesses have drifted up and wage growth has picked up as the recovery has strengthened.

    Looking ahead, the inflation outlook largely depends on the path of domestic demand and administered prices, notably fuel and electricity, as well as global commodity prices. The MPC will continue to carefully monitor developments affecting medium-term prospects for inflation, financial stability and growth and stands ready to respond appropriately.

    SBP issues annual schedule for monetary policy