The State Bank of Pakistan (SBP) announced on Monday that it will maintain the key policy rate at 22%. This decision, reached by the Monetary Policy Committee (MPC), comes in the wake of a decreasing trend in inflation, which dropped from its peak of 38% in May to 27.4% in August 2023.
The MPC, established as a statutory committee under the SBP Act, took into account several factors in making this decision. Despite recent increases in global oil prices, inflation is expected to continue decreasing, especially in the second half of the year.
The MPC highlighted four key developments since its last meeting in July:
- Improved Agricultural Outlook: Based on data indicating better input conditions and healthy vegetation of crops, the agricultural sector outlook has improved.
- Rising Global Oil Prices: Global oil prices have surged, reaching over $90 per barrel.
- Current Account Deficit: After remaining in surplus for four months, the current account posted a deficit in July, partly due to eased import restrictions.
- Regulatory Measures Yield Results: Measures aimed at improving the availability of essential food commodities and curbing illegal activities in the foreign exchange market have started to show results, narrowing the gap between interbank and open market exchange rates.
The MPC also emphasized its commitment to monitoring inflation risks and taking necessary action to maintain price stability. It called for a prudent fiscal stance to control aggregate demand.
Real Sector: The MPC noted moderate growth in the sales of key inputs such as petroleum, fertilizer, and cement, as well as a slight increase in import volumes. The agriculture sector’s outlook has improved with better input conditions.
External Sector: In July 2023, the current account balance recorded a deficit of $809 million, in line with projections that accounted for increased import volumes.
Revenue Increase: In the initial two months of FY24, the Federal Board of Revenue (FBR) saw a 27.2% increase in revenues compared to the same period last year, attributed to fiscal measures and some economic activity recovery.
The MPC stressed the importance of achieving the targeted primary surplus of 0.4% of GDP to support monetary policy’s objective of price stability. Broadening the tax base, targeted subsidies for the vulnerable, and reforms in public sector enterprises were highlighted as measures to bring inflation down and promote sustainable economic growth.
Money and Credit: As of September 1, broad money (M2) growth decelerated to 13.6% year-on-year due to a slowdown in private sector credit. Reserve money growth also slowed, reflecting a reduction in currency in circulation. Expected fiscal consolidation and increased economic activity may lead to a moderate expansion in private sector credit this year.
Inflation Expectations: The national Consumer Price Index (CPI) inflation decreased to 27.4% in August, but the decline was lower than anticipated due to higher global oil prices and their impact on energy prices. Short-term inflation expectations reversed their declining trend in both consumer and business surveys.
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Despite these challenges, the MPC believes that recent regulatory and law-enforcement measures will address supply constraints and illegal activities in the foreign exchange markets. Together with an improved agricultural outlook and a tight monetary policy stance, inflation is expected to continue decreasing, especially in the second half of 2023. Inflation is likely to increase in September due to base effects and energy price adjustments but is expected to decline again in October and maintain a downward trajectory thereafter.
