SBP surprisingly leaves rate on hold

Says inflation has peaked out, leaving no room for rate hike, at least for now

KARACHI:

In a surprising move, Pakistan’s central bank on Thursday left its benchmark policy rate – the cost of bank borrowing – unchanged at 22%, contrary to expectations of an aggressive hike of up to 300 basis points.

The announcement signaled that the country’s economy was moving in the right direction, slowly and gradually.

The State Bank of Pakistan (SBP) pointed out that inflation had peaked out at 38% in May and stood relatively low at an average of 27.8% in first two months (July-August) of current fiscal year 2023-24, leaving no room for rate hike, at least for now.

Real interest rate has remained in positive territory on a 12-month forward-looking basis.

Read SBP keeps policy rate unchanged at 22% against expectations

At an analyst briefing after the announcement of monetary policy, SBP Governor Jameel Ahmad was quoted as saying that the central bank had successfully achieved all four quantitative targets of the International Monetary Fund (IMF) for first review in November 2023 under the ongoing $3 billion loan programme.

Pakistan is required to arrange net external financing of $8 billion in the current fiscal year to repay the maturing foreign debt, pay interest cost of external debt and finance the current account deficit.

Despite rising imports, the current account gap narrowed to $160 million in August 2023 as compared to slightly over $800 million in July.

Agricultural output has also improved, extending its support to economic growth. Besides, a crackdown on currency smugglers has brought positive results, supporting the recovery of Pakistani rupee and improving supply of US dollars in the country.

Arif Habib Limited CEO Shahid Ali Habib, in post-monetary policy comments, said that the SBP had achieved four major IMF targets including reducing the central bank’s swap book to $4.2 billion, meeting net domestic assets (NDA) target of Rs15 trillion and net international reserves target of $14.6 billion, as well as refraining from lending to the government.

Topline Securities CEO Muhammad Sohail commented, “We believe there is a high risk that inflation may remain higher than the SBP’s estimate due to rising global oil prices and adjustment in energy tariffs in Pakistan.”

AHL Head of Research Tahir Abbas said the central bank left unchanged its projection for inflation at 21-22% and for economic growth in the range of 2-3% for FY24.

He was of the view that inflation may remain relatively high in September, but would start decelerating from October onwards, adding that inflation would come down aggressively in the second half of FY24.

Ismail Iqbal Securities Head of Research Fahad Rauf quoted the SBP governor as saying that (multilateral/ bilateral/ commercial) inflows were likely to touch $14 billion for the remaining part of FY24.

Pakistan is scheduled to repay $21.5 billion in principal loans in current fiscal year, of which $2.2 billion has already been released and loan rollovers of $8 billion have been confirmed.

Further rollover of $3 billion is expected, which will leave a net $8 billion that will be repaid during the year. Interest payments have been estimated at $3.4 billion, of which $0.6 billion has already been paid.

Alpha Beta Core CEO Khurram Schehzad remarked that the SBP rightly maintained status quo in the policy rate. “Any increase in interest rate would have been redundant. We need to control the fiscal side and improve overall market governance.”

In its monetary policy statement, the central bank said that though inflation came down in July-August FY24 compared to May, “the decline was lower than anticipated largely due to the surge in global oil prices and their pass-through to administered energy prices.”

Even though global oil prices have risen recently and are being passed on to consumers through adjustment in energy prices, “inflation is projected to remain on the downward trajectory, especially from the second half of this year,” the bank said.

Among other key developments that emerged since the previous monetary policy announcement in July, according to the SBP, the agricultural outlook has improved, based on latest data on cotton arrivals, better input conditions, and satellite data indicating healthy growth of other crops.

Secondly, global oil prices have been on the rise and are now hovering above $90 per barrel.

The central bank pointed out that there was moderate pick-up in sales of key inputs like petroleum products, fertiliser and cement, along with a slight increase in import volumes.

Nonetheless, “the MPC (Monetary Policy Committee) views that overall imports are expected to remain in check, supported by the favourable trend in non-oil commodity prices, moderate domestic demand and improved cotton production. Favourable rice prices and available surplus bode well for the export outlook.”

Published in The Express Tribune, September 15^th, 2023.

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