Policy rate left unchanged

In line with market expectations, the central bank on Tuesday left its key policy rate unchanged at a record high of 22% ahead of the International Monetary Fund’s (IMF) board meeting for approval of the next loan tranche of $700 million in January 2024.

It was the fourth consecutive monetary policy in the past six months when the bank made no change in the policy rate, maintaining the tight policy partly due to high inflation. The central bank pointed out that the recent increase in gas prices was higher than its expectation, taking inflation to the higher side at 29.2% in November 2023. It projected that falling international commodity prices including oil prices would offset the impact of the gas price hike.

It avoided projection of average inflation reading for the current fiscal year in the monetary policy statement.

Topline Research quoted State Bank of Pakistan (SBP) Governor Jameel Ahmad as saying at an analyst briefing post-monetary policy announcement that the bank only “revises inflation reading twice in a year” – in July and January, hinting it would assess inflation in the next monetary policy due in January 2024.

design: Ibrahim Yahya

Earlier, the bank projected average inflation at 20-22%, a forecast that it has kept unchanged since July 2023. Policy rate is a tool available with the central bank for controlling inflation, which is a must to achieve sustainable economic growth.

The SBP cumulatively jacked up the policy rate by 15 percentage points in a period of 27 months to 22% in June 2023.

Financial experts believe the policy rate has peaked out and expect the bank to start reducing it from calendar year 2024, potentially from March, as the bank foresees a fast deceleration in inflation in the second half (Jan-Jun) of FY24.

The market projects a seven-percentage-point reduction in the policy rate to 15% by December 2024 in a bid to ramp up economic activities to achieve a moderate growth of 2-3% in FY24. Insight Research quoted the SBP governor as saying that Pakistan had to repay a net principal amount of $4.3 billion in the remaining seven months of the current fiscal year.

According to Topline Research, Governor Ahmad said that the total external financing requirement for FY24 was estimated at $24.6 billion, of which $5.4 billion had already been paid. The SBP estimated rollover of $12.4 billion, of which $9 billion had already been committed.

The IMF expects Pakistan’s foreign exchange reserves to reach $9 billion by June 2024. Its country report would be released after board meeting in January where revised numbers may be provided, the research house said.

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The latest monetary policy statement added that the State Bank decided to maintain the policy rate at 22%. “The decision does take into account the impact of the recent hike in gas prices on inflation in November, which was relatively higher than the MPC’s (monetary policy committee’s) earlier expectation. “The committee viewed that this may have implications for the inflation outlook, albeit in the presence of some offsetting developments, particularly the recent decrease in international oil prices and improved availability of agricultural produce.”

Furthermore, the committee assessed that the real interest rate continued to be positive on a 12-month forward-looking basis and inflation was expected to remain on a downward path. Barring further sizable increase in administered prices, the MPC continues to expect that headline inflation will decline significantly in the second half (Jan-Jun) of FY24 due to contained aggregate demand, easing supply constraints, moderation in international commodity prices and a favourable base effect.

It noted several key developments since its October meeting. First, the successful completion of a staff-level agreement of the first review under the IMF standby arrangement (SBA) will unlock financial inflows and improve the SBP’s foreign exchange reserves. Second, the quarterly gross domestic product (GDP) growth outcome for 1QFY24 remained in line with the MPC’s expectation of a moderate economic recovery.

Third, recent consumer and business confidence surveys showed improvement in sentiments. “Finally, core inflation is still at an elevated level and is coming down only gradually.” Taking stock of these developments, the committee assessed that the current monetary policy stance was appropriate to achieve the inflation target of 5-7% by the end of FY25.

It reiterated that the assessment was also contingent upon continued targeted fiscal consolidation and timely realisation of planned external inflows. The MPC viewed that the recovery in real GDP during FY24 was expected to remain moderate. The real GDP grew 2.1% in the first quarter of FY24 compared to 1% in the same quarter of last year.

As per earlier expectation, recovery in the agriculture sector was the major driver of the growth. The manufacturing sector also recorded a moderate recovery, with growth in large-scale manufacturing becoming positive after contracting in the preceding four quarters.

Published in The Express Tribune, December 13^th, 2023.

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