SBP maintains key interest rate at 22pc for fifth time in a row

Published January 29, 2024
— The State Bank of Pakistan governor, Jameel Ahmed
— The State Bank of Pakistan governor, Jameel Ahmed

The State Bank of Pakistan (SBP) on Monday held its key rate at 22 per cent for the fifth policy meeting in a row.

The decision is the last under the caretaker government before general elections due next week. It also comes in the midst of the $3 billion Standby Arrangement (SBA) with the International Monetary Fund (IMF).

Addressing a press conference in Karachi today, SBP Governor Jameel Ahmad said the central bank’s Monetary Policy Committee (MPC) had met earlier today and reviewed the “current economic developments”.

“The MPC decided that the current policy rate, which is 22pc, will continue. In other words, it decided to maintain status quo,” he said.

Ahmad said the MPC noted that Pakistan’s external account had “improved”, which was reflected in the country’s foreign exchange reserves. He said that in July 2023, when Pakistan had signed a standby agreement with the International Monetary Fund, forex reserves were a little over $4 billion.

“In the past six months, our reserves have increased to more than $8bn. Right now they are $8.3bn. This is despite the fact that we have repaid $6.2bn of principle foreign debt,” the governor said, adding that interest payments were also done.

“So despite all these payments, our reserves have increased by $4bn,” he said. Ahmad went on to say that the SBP’s forward book, which was at $4.5bn in July, had improved to $3.5bn.

He recalled that the current account deficit was very high in 2022 but was later contained following measures taken by the central bank and the government. “It shrunk from 4.7pc to 0.7pc and in the first six months of the current fiscal year, it is contained and stands at $800m. A similar trend is continuing in January as well,” the SBP governor added.

But at the same time, Ahmad highlighted that Pakistan had to make several debt repayments this year.

Talking about inflation, he said the MPC reviewed inflation-related developments. In May 2023, inflation peaked at 38pc but a declining trend has been noted now. “Although it still remains elevated, inflation will start declining faster from March,” Ahmad added.

The SBP governor said the MPC committee also closely reviewed inflated gas and electricity prices that impacted the continued inflationary pressure. “Keeping this in view, the committee has revised the average inflation assessment for the current fiscal year to 23-25pc,” he stated.

Similarly, Ahmad said the central bank had set a medium-term target, which would be achieved by September 2025.

He further stated that business confidence had improved in recent days and its reflection could be seen in Pakistan’s economic activity, particularly in industrial capacity utilisation and large-scale manufacturing.

“We also kept our economic growth data in front of the MPC and we are confident that we will be able to achieve the GDP growth of 2-3pc,” Ahmad said, adding that the next MPC meeting would be held in March.

‘In line with market consensus’

Mohammed Sohail, chief executive of Karachi-based brokerage firm Topline Securities, said today’s announcement was “in line with market consensus”.

“An increase in average CPI estimate was also expected as SBP revised its estimate in July and Jan only,” he told Dawn.com.

Sohail added the SBP agreed that external account position and business confidence had improved “but inflation, though falling, is still high for an immediate rate cut”.

The key rate was raised to an all-time high of 22pc in June to fight persistent inflationary pressures and to meet one of the conditions set by the IMF for securing the bailout.

While the rescue programme has helped avert a sovereign debt default, some of its conditions, such as raising its benchmark interest rate, increasing government revenue, and increasing electricity and natural gas prices have complicated efforts to curb inflation and have dampened business sentiment.

Previously, Pakistan Bureau of Statistics (PBS) data showed inflation in December hit another high of 29.7pc, a slight increase from November.

Additionally, the SBP’s foreign exchange reserves stood at $13.34 billion in the week ending January 19th after the central bank confirmed it had received the latest tranche release of $700 million from the IMF, in addition to the UAE confirming the rollover of its two deposits of $1bn placed with the central bank for another year.

After completing the first review of the SBA for Pakistan, the IMF issued a press release on Jan 11 with the observation that inflation remains elevated, although, with appropriately tight policy, this could decline to 18.5pc by the end of June.

Money market experts said this remark was enough to understand the IMF’s direction for the interest rate.

 The graph shows the annual per change in inflation rate in Pakistan, in addition to IMF’s projection for the coming years via the IMF website
The graph shows the annual per change in inflation rate in Pakistan, in addition to IMF’s projection for the coming years via the IMF website

Overall, according to a survey of key market participants conducted by Topline Securities, 68pc expected the policy rate to remain unchanged at 22pc, while the remaining 32pc anticipate a policy rate cut.

This is in spite of a surprise fall in T-Bill yields by 50-62bps in the recent auction, which indicated a rate cut in the near future.

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