KARACHI: The State Bank of Pakistan (SBP) on Monday kept the key policy rate unchanged at 22%, governor Jameel Ahmad has announced.
Prior to this announcement, some analysts anticipated the status quo, while others predicted a rate increase of 100–200 basis points.
The Monetary Policy Committee kept the key policy rate at 21% during its meeting on June 12, 2023. In that statement, it was stated that the tight monetary policy, domestic unrest, and ongoing strain on the external account would cause domestic demand to stay weak.
3/4 The MPC assesses inflation to fall gradually during the first half of FY24, before falling below 20 percent in the second half.
— SBP (@StateBank_Pak) July 31, 2023
“While the inflation trajectory has shifted slightly upward after the recent energy tariff adjustments and additional taxation measures, the MPC assessed the continuation of ongoing tight monetary policy stance as appropriate to bring inflation down to the medium-term target,” the central bank said in a press release.
It stated the MPC assessed inflation to fall gradually during the first half of FY24, before falling below 20pc in the second half.
“The moderate growth outlook for FY24, addressing of short-term external sector vulnerabilities post-IMF SBA, and lagged impact of accumulated monetary tightening so far, were major factors behind the MPC’s decision,” it added.
“In this backdrop, and given the declining m/m trend, the MPC views inflation to have peaked at 38 percent in May 2023, and barring any unforeseen developments, expects it to start falling from June onwards.”
However, on June 26, the MPC convened an emergency meeting, and decided to raise the policy rate by 100 bps to 22% to keep real interest rate firmly in the positive territory on a forward-looking basis. It cited “certain upward revisions in taxes, duties and PDL rate in FY24 budget” and the SBP’s withdrawal of the general guidance for commercial banks on prioritisation of imports as having increased the “upside risks to the inflation outlook” for the rate-hike.
Since that meeting, a number of key economic developments on the domestic front took place.
The Consumer Price Index (CPI)-based inflation clocked in at 29.4% in June on a year-on-year basis, as compared to 38% recorded in May. Analysts expect inflation to hover around 27-28% in July, but a power tariff hike – approved last week – may present an upside risk to inflation.
Meanwhile, the Sensitive Price Indicator-based inflation for the week ended July 26, 2023 was recorded at 268.08 points against 258.45 points registered in the previous week, an increase of 3.73%.
