SBP interest rate stands unchanged at record high 21%

In line with market expectations, Pakistan's central bank left its benchmark policy rate unchanged at a record high of 21%. The bank maintains that the rate was appropriate considering inflation peaked at 38% in May and is expected to ease down from June and onward.

In its monetary policy statement issued on Monday, the State Bank of Pakistan (SBP) stated "MPC (monetary policy committee) views the current monetary policy stance, with positive real interest rates on forward-looking basis, as appropriate to anchor inflation expectations and to bring down inflation towards the medium term target - barring any unexpected domestic and external shocks".

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"However, the MPC emphasised that this outlook is also contingent on effectively addressing the prevailing domestic uncertainty and external vulnerabilities."

The bank noted that higher inflation outturns for April and May were generally as anticipated. The committee expects domestic demand to remain subdued amid tight monetary stance, domestic uncertainty and continuing stress on the external account.

To recall, the central bank has so far jacked up the policy rate cumulatively by 7.25 percentage points in the outgoing fiscal year, which ends June 30, 2023.

The rate was partially hiked on the recommendation of the International Monetary Fund (IMF) to win back its stalled $6 billion loan program expiring along with the ending FY23.

The committee noted multiple important developments since the last meeting. First, the provisional National Accounts estimates show real GDP growth to have decelerated considerably during FY23.

Second, the current account balance recorded back-to-back surpluses in March and April 2023, which reduced some pressures on foreign exchange reserves.

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Third, the government unveiled the budget for FY24 on June 9, "which envisages a slightly contractionary fiscal stance against the revised estimates for FY23".

Fourth, global commodity prices and financial conditions have eased recently and are expected to persist in the short term.

The MPC expects that reduced demand-side pressures and ease in inflation expectations, along with moderating global commodity prices and high base effect, would help bring inflation down from June 2023 onwards. "In this context, the MPC views that maintaining the current policy stance is necessary to bring inflation down to the medium-term target range of 5-7% by the end of FY25”.