KARACHI: State Bank of Pakistan (SBP) likely to keep policy rate unchanged at 15 per cent at its policy announcement scheduled on October 10, 2022.
A report issued by Arif Habib Limited stated that the central bank may keep the policy rate unchanged at 15 per cent in the upcoming monetary policy.
To recall, in the last Monetary Policy Statement (MPS) too, policy rate was kept unchanged at 15 per cent. The current pause of the MPC has been dictated by the planned fiscal consolidation in FY23, recent developments in inflation being in-line with expectations, moderation in domestic demand and improvement in the external position.
The recent Balance of Payment numbers show that Pakistan’s current account deficit decreased by 19 per cent YoY to USD 1.9 billion during first two months of the current fiscal year, as against a deficit of USD 2.4 billion during the same period last year.
This YoY decline is mainly on the back of lower imports and jump in exports. With the measures taken by the authorities to curb import along with decline in international commodity prices, current account deficit is likely to remain lower in FY23 compared to FY22’s Current Account Deficit (CAD).
As a result of a contained CAD and disbursement from IMF post successful completion of seventh and eighth review, Pakistani Rupee (PKR) showed recovery against USD in August 2022 which, however, was short-lived and the following month (September 2022), PKR depreciated 4.2 per cent against USD.
However, SBP believes that Pakistan’s external financing needs should be more than fully met in FY23 aided by rollovers by bilateral official creditors, new lending from multilateral creditors, and a combination of bond issuances, FDI and portfolio inflows.
Thus, pressure on the Rupee should lessen while foreign exchange reserves of the SBP should assume the upward trajectory which currently stand at USD 8 billion as of September 23, 2022.
In addition, another positive development since the last MPC meeting has been the decline in international prices of major commodities such as WTI (-12 per cent), Coal (-14 per cent), Brent (-9 per cent), Steel (-2 per cent), Cotton (-18 per cent) and Arab Light (-6 per cent). This bodes well for our external account position, hence providing much needed relief to our trade numbers.
On the domestic front, most of the high frequency (demand) indicators showed moderation to decline in growth on a YoY basis. Attributable to monetary and fiscal tightening, which helped shrink the positive output gap and curtail demand side pressures, we saw decline in sales of petroleum products (-23 per cent YoY), cement (-8 per cent YoY), DAP (-79 per cent YoY) and power generation (-12.6 per cent YoY). Moreover, with recent flood damaged agriculture growth, lower yields of cotton and seasonal crops could weigh on growth this year.
As mentioned in the last MPS, SBP is closely monitoring the inflation trajectory. On the inflationary front, the headline inflation continues to remain in the double digit since November 2021 mainly on the back of uptick in food and energy prices.
In the month of September 2022, headline inflation clocked-in at 23.2 per cent YoY. However, on MoM basis, inflation receded by 1.15 per cent mainly due to cut in electricity cost.
Headline inflation, after peaking in August 2022, has started to taper off. Moreover, it is expected to have peaked in the out-going quarter of FY23 and is likely to come down with high base-effect kicking-in.
