SBP maintains interest rate at 22pc

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The State Bank of Pakistan’s (SBP) Monetary Police Committee (MPC) 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 Tuesday.

“The decision does take into account the impact of the recent hike in gas prices on inflation in November, which was relatively higher than the MPC’s earlier expectation,” the committee explained after a meeting.

“The committee viewed that this may have implications for the inflation outlook, albeit in the presence of some offsetting developments, particularly the recent decrease in international oil prices and improved availability of agriculture produce.”

The MPC further assessed that the real interest rate continued to be positive on a 12-month forward-looking basis and inflation was expected to remain on a downward path.

It noted that several key developments had taken place since October: a staff-level agreement with the International Monetary Fund (IMF) on the first review of a $3 billion bailout had unlocked financial inflows and improved the central bank’s foreign reserves; quarterly GDP growth outcome for the first quarter of the current fiscal year remained in line with the MPC’s expectation of a moderate economic recovery; recent consumer and business confidence surveys showed improvement in sentiments and lastly, core inflation was still at an elevated level and was coming down only gradually.

In light of these developments, the MPC said, “The current monetary policy stance is appropriate to achieve the inflation target of 5-7pc by end-FY25.”

It added that its assessment was also “contingent upon continued targeted fiscal consolidation and timely realisation of planned external inflows”.

The press release further said that according to the MPC, real GDP recovery during FY24 was expected to remain moderate.

The MPC further pointed out that inflation expectations of both consumers and businesses, though improving in recent months, remained at an elevated level.

“Nevertheless, barring further sizable increase in administered prices, the MPC continues to expect that headline inflation will decline significantly in the second half of FY24 due to contained aggregate demand, easing supply constraints, moderation in international commodity prices and favourable base effect,” the press release said.

The decision to keep the interest rate unchanged was anticipated and at par with several analysts’ expectations. A report by Topline Securities showed that 63pc of key market players expected no change in the key rate.

Previously, Pakistan Bureau of Statistics data showed inflation in November hit another high of 29.2pc, a slight increase from October but well below a peak of 38pc in May. The two major factors behind the hike were noted to be gas prices, which jumped by 520pc in November, and electricity rates.

Moreover, the country faces a long and winding road to economic recovery under the $3bn loan programme, approved by the IMF in July. Although the programme helped save the country from default, it has stringent conditions aimed at curbing inflationary pressure.

The SBP policy rate was raised to an all-time high of 22pc in June and has stayed unchanged for the last three review meetings.

Additionally, the SBP’s foreign exchange reserves dropped by $237 million to $7bn in the week ending Dec 1, the central bank said in a statement, as debt servicing on foreign loans continues to eat up SBP’s holdings.

The World Bank’s regional vice president for South Asia, Martin Raiser, recently said in an address to economists that Pakistan’s economy was stuck in a low-growth trap with poor human development outcomes and increasing poverty.

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