The State Bank of Pakistan (SBP) on Monday decided to maintain the status quo by keeping the key policy rate unchanged at 22% for the seventh time in a row, while noting stabilization measures had reduced inflation.
In a statement issued after a meeting of its Monetary Policy Committee (MPC), the central bank said macroeconomic stabilization measures were contributing to considerable improvement in both the inflation and external positions, amidst moderate economic recovery. “However, the MPC viewed that the level of inflation is still high. At the same time, global commodity prices appear to have bottomed out with resilient global growth,” it said, cautioning uncertainty in the outlook due to recent geopolitical events. It also noted that upcoming budgetary measures might impact the near-term inflation outlook.
The MPC said it was necessary to continue the current monetary policy stance to bring inflation down to the target range of 5-7% by September 2025.
According to the MPC, data for the first half of the fiscal year 2024 suggested economic activity is recovering at a moderate pace, led by strong rebound in the agriculture sector. It also noted a sizable surplus in the current account in March 2024, adding this helped stabilize the SBP’s foreign exchange reserves despite substantial debt repayments and weak financial inflows.
“Third, inflation expectations of consumers inched up in April 2024, whereas those for businesses declined. And lastly, leading central banks particularly in advanced economies have adopted cautious policy stance after noticing some slowdown in the pace of disinflation in recent months,” it said, pointing to incoming data supporting the MPC’s earlier expectation of a moderate recovery in this fiscal year with real GDP growth projected to remain in the range of 2-3%.
Describing the agriculture sector as the key driver with robust 6.8% growth in the first half of FY24, it said the industrial sector had seen a decline of 0.5% in large-scale manufacturing from July-February, compared to a 4% contraction in the same period last year. The services sector, it said, had slightly lower than expected growth in the first half of the ongoing fiscal year, reflecting the impact of subdued demand.
The MPC credited the current account surplus of $619 million in March 2024 to Eid-related surge in workers’ remittances, adding the current account deficit (CAD) had narrowed by 87.5% to $0.5 billion during July-March FY24 as compared to the same period last year. “Exports continue to exhibit steady growth—led by rice—while imports have decreased in the wake of better domestic agriculture output and moderate economic activity,” it said. The reduction in the CAD, it said, allowed the SBP to make sizable debt repayments, including that of a $1 billion Eurobond, while sustaining foreign exchange reserves around $8 billion.
“The MPC emphasized that a further build-up in FX buffers is essential to enhance the country’s ability to effectively respond to external shocks and support sustainable economic growth,” read the statement.
On inflation, the MPC said it continued to moderate noticeably in the second half of FY24. In March, headline inflation declined to 20.7% year-on-year from 23.1% in February, it said, adding core inflation fell significantly to 15.7% from 18.1% in February. The statement credited this to a coordinated tight monetary and fiscal policy response, as well as lower global commodity prices, improved food supplies and high base effect.
The MPC expected inflation to continue to remain on a downward trajectory, but warned this was susceptible to risks emanating from the recent global oil price volatility along with the bottoming out of other commodity prices; the potential inflationary impact of resolution of circular debt in the energy sector; and tax rate-driven fiscal consolidation going forward. “Cognizant of these risks, the Committee assessed that it is prudent to continue with the current monetary policy stance at this stage, with significant positive real interest rates,” it added.