The State Bank of Pakistan (SBP) on Monday maintained the status quo and decided to keep the key policy rate unchanged at 22 per cent.

The announcement was made by SBP Governor Jameel Ahmed after a meeting of the bank’s Monetary Policy Committee (MPC).

The State Bank said that the moderate growth outlook for the current fiscal year, addressing short-term external sector vulnerabilities in the wake of the International Monetary Fund’s (IMF) stand-by agreement (SBA) and lagged impact of accumulated monetary tightening so far were major factors behind the MPC’s decision.

The SBP has raised its key policy rate by 12.25 percentage points since April 2022, mainly to curb soaring inflation. SBP held rates steady in June saying inflation had peaked at 38pc in the preceding month.

But before June’s end, it raised rates by 100 bps at an emergency meeting, citing a “slightly deteriorated inflation outlook”.

In a press conference today, SBP Governor Jameel Ahmed said the decision to maintain the policy rate was taken after reviewing inflation and external development. “There was a significant decline in year-on-year inflation in June,” he pointed out.

Similarly, average inflation during the fiscal year 2023 clocked in at 29.2pc.

He highlighted that the MPC had forecasted inflation between 20pc and 22pc for the current fiscal year.

“In the coming months, inflation will start steadily declining. From July to December, the inflation rate will gradually decrease but we will see a steady decline from January to June 2024.

“Ultimately, the committee assessed that we are on track to bring inflation to 5-7pc by the end of 2025,” the SBP governor added.

He further said that economic growth was also discussed in the MPC meeting today and growth was expected to stay between 2pc and 3pc in FY24.

Ahmed said the SBP was aiming at sustained and continued growth at a “sustainable level” unlike past years where it hit highs but then had to be slowed down due to the economy heating up.

Separately, the SBP said in a press release that the MPC meeting noted that economic uncertainty had decreased since its last meeting, whereas near-term external sector challenges were largely addressed and investor confidence had improved.

“While some upside risks to the inflation outlook have emerged, the committee also took note of the expected lagged impact of the accumulated monetary tightening so far, budgeted fiscal consolidation and the tepid growth outlook for FY24. The MPC particularly noted that year-on-year (y/y) inflation is likely to remain on downward path over the next 12 months, which implies a significant level of positive real interest rate,” the press release reads.

It also noted that several important developments had influenced the short-term macroeconomic outlook since the MPC’s last meeting such as the IMF agreement that helped address “immediate external sector stability concerns by supporting the foreign exchange reserves.

“With disbursement of the first tranche under the SBA and $3bn in bilateral support, the SBP’s FX reserves increased from $4.5bn at end June 2023 to $8.2bn as of July 21, 2023.”

Further, it pointed to the recent rise in the electricity tariff that the SBP said would contribute to inflation in the coming months.

The central bank also observed that global commodity prices had somewhat increased but were still lower than their recent peak, adding, that the IMF in its July 2023 World Economic Outlook had also slightly raised its projection of global growth this year while leaving the 2024 growth projection unchanged.

“In light of these developments, the MPC stressed on maintaining an appropriately tight monetary policy stance with positive real interest rates on forward-looking basis to keep inflation and its expectation on downward path so as to achieve the medium-term inflation target of 5–7pc by end-FY25.,” the press release concluded.

On the current account deficit, the SBP said it was expected to remain contained in the range of 0.5-1.5pc of GDP in FY24, based on the impact of evolving domestic and global economic conditions.

Regarding the governor’s inflation outlook, the press release explained that year-on-year inflation was expected to remain on a downward trajectory due to subdued domestic demand amid a tight monetary policy stance, a favourable outlook for global commodity prices and a positive base effect.

However, the SBP added that its inflation outlook was subject to risks arising from domestic and external shocks such as adverse climate events and global commodity price volatility. “In this regard, the MPC will continue to carefully monitor the impact of unfolding domestic and global developments on the inflation outlook, and, if required, recalibrate the monetary policy stance to achieve price stability,” the press release added.