The State Bank of Pakistan (SBP) has decided to maintain the status quo and keep the key policy rate unchanged at 22 per cent to keep the aggregate demand in check, according to a press release issued on Thursday.

The announcement came after a meeting of the bank’s Monetary Policy Committee (MPC).

“This decision takes into account the latest inflation outturn reflecting the continuing declining trend in inflation from its peak of 38pc in May to 27.4pc in August 2023.

“Even though global oil prices have risen recently and are being passed on to consumers through adjustments in administered energy prices, inflation is projected to remain on a downward trajectory, especially from the second half of this year,” the state bank said.

The monetary policy is critical for the stakeholders of the economy, particularly in the wake of over 26pc inflation. The current interest rate has already discouraged traders and businessmen from borrowing costly bank money.

In its press release today, the MPC noted that four key developments had taken place since its previous meeting in July. Among them were the improved agricultural outlook, rising global oil prices, current account deficit in July, and results of recent administrative and regulatory measures aimed at improving the availability of essential food commodities and curbing illegal activities in the foreign exchange market.

Moreover, it stated: “The MPC noted that it will continue to monitor the risks to the inflation outlook and, if required, it will take appropriate action to achieve the objective of price stability.

“At the same time, the MPC also stressed on maintaining a prudent fiscal stance to keep aggregate demand in check. This is necessary to bring inflation down on a sustainable basis and to achieve the medium-term target of 5pc–7pc by the end of FY25.”

The committee further noted that inflation was likely to increase significantly in September mainly due to the base effect and the adjustment in energy prices. However, it said inflation was expected to subsequently decline in October and maintain its downward trajectory from thereon.

‘High risk’

Speaking to Dawn.com, Topline Securities CEO Mohammed Sohail said the MPC had kept the rate unchanged “contrary to expectations”.

“SBP believes inflation will remain in check despite rising oil and power prices and real interest rate will be positive. Moreover, the bank is optimistic about measures taken to curtail currency speculation and smuggling. It is also positive on implications of agri growth this year

“We believe there is a high risk that inflation may remain higher than the SBP estimate,” he highlighted.

Economist Ammar Khan said the central bank, by keeping the policy rate unchanged, had continued to maintain “real interest rates in deep negative territory particularly when the money supply continues to increase unabated”.

He further stated that inflation was expected to remain elevated with upward pressure in key energy commodities.

On the other hand, Ismail Iqbal Securities Head of Research Fahad Rauf said the SBP’s decision was “in line with our expectations”.

“I think it’s a fair decision, given that there are no signs of an overheating economy, and a rate hike would have yielded little benefit in terms of curbing cost-push inflation,” he said.

Rauf added that rate hikes would have further increased the government’s fiscal deficit and created a credit risk for the banking system.

Intermarket Securities’ Head of Equities Raza Jafri told Dawn.com that with the new rate, the KSE100 index could be expected to bounce back in the “near term”.

“However, clarity is needed on politics, the successor of the International Monetary Fund program, and planned foreign direct investment from the Gulf Cooperation Council for there to be sustainable improvement,” he added.

JS Global Capital’s Head of Research Amreen Sorani opined that the policy rate was maintained keeping in view the “expected decline in inflation”.

“As per the SBP, real interest rates are still in the positive zone on a forward-looking basis,” she said.