KARACHI:
For the third time in four months, Pakistan’s central bank has kept its benchmark policy rate at a record high of 22 percent, citing continued inflation concerns and the need to strike a balance between inflation and economic activity.
In its latest monetary policy statement delivered on Monday, the State Bank of Pakistan (SBP) declared “[The monthly] headline inflation rose in September 2023 as expected. However, it is predicted to decrease in October and then follow a downward trend, especially in the second half of the fiscal year”.
The monetary policy committee (MPC) acknowledged significant risks to the FY24 projection for inflation and the current account, such as the recent volatility in global oil prices and the increase in gas tariffs from November 2023.
“These include the targeted fiscal consolidation in Q1; improvement in market availability of key commodities; and the alignment of interbank and open market exchange rates.”
Key developments since the MPC’s last meeting in September were discussed. As a first point, it’s worth noting that the optimistic early forecasts for kharif crops will have a ripple impact throughout the economy.
Second, SBP was able to maintain its foreign reserve position despite weak external financing since the current account deficit shrank significantly in August and September.
Third, fiscal consolidation remained on track, with both fiscal and primary balances increasing during Q1-FY24.
Fourth, although core inflation has been stubbornly high, recent pulse surveys have shown an uptick in consumer and corporate inflation expectations. “However, global oil prices remain quite volatile and the conflict in the Middle East makes its outlook even more uncertain.”
The MPC stressed the importance of maintaining the current tight monetary policy stance in light of these developments. The MPC reaffirmed its former position that inflation should be reduced to the medium-term goal range of 5%-7% by the end of FY25, with the real policy rate being notably positive on a 12-month forward-looking basis.
“However, the MPC noted that this outlook is based on continued fiscal consolidation and timely realization of planned external inflows.”
