ISLAMABAD: The Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) convened today and decided to maintain the policy rate at 22 percent.
This decision comes in the context of ongoing macroeconomic stabilization measures, which have contributed to significant improvements in both inflation and the external position.
Despite these positive developments, the MPC remains concerned about the persistently high inflation levels. Additionally, global commodity prices have stabilized, and geopolitical events introduce uncertainty into the economic outlook.
The upcoming budgetary measures may also impact near-term inflation. The Committee emphasizes the need to continue the current monetary policy stance to achieve the inflation target range of 5 – 7 percent by September 2025.
Key Developments Since the Last Meeting
- Economic Recovery: Data for the first half of FY24 indicates a moderate recovery, driven by a robust 6.8 percent growth in the agriculture sector. Rice, cotton, maize, and wheat harvests have contributed significantly to this outcome.
- Current Account Surplus: The current account recorded a sizable surplus of $619 million in March 2024, primarily due to a surge in workers’ remittances during Eid. Cumulatively, the current account deficit narrowed by 87.5 percent during July-March FY24 compared to the same period last year.
- Inflation Expectations: Consumer inflation expectations increased slightly in April 2024, while business expectations declined. Leading central banks in advanced economies have adopted cautious policies due to a slowdown in disinflation.
Real Sector Outlook
- GDP Growth: The MPC expects real GDP growth to remain in the range of 2 to 3 percent for this fiscal year. The agriculture sector continues to be the key driver, with strong performance in H1-FY24.
- Industrial and Services Sectors: Large-scale manufacturing reported a 0.5 percent decline in July-February FY24, while services sector growth was slightly lower than expected. However, improved capacity utilization and business sentiments are likely to drive recovery in the coming months.
External Sector and Fiscal Outlook
- Current Account: The current account surplus in March 2024 helped stabilize SBP’s foreign exchange reserves. Exports, particularly rice, continue to grow, while imports decreased due to better domestic agriculture output.
- Fiscal Consolidation: Efforts toward fiscal consolidation resulted in a primary surplus of 1.8 percent of GDP during July-January FY24. Broadening the tax base and reducing losses of public sector enterprises remain essential for price stability and sustainable economic growth.
Money, Credit, and Inflation
- Money Supply (M2): Growth increased to 17.1 percent y/y in March 2024, driven by net foreign assets expansion and increased net budgetary borrowing from commercial banks.
- Private Sector Credit: A broad-based deceleration in private sector credit is observed.
- Inflation: Inflation has moderated in H2-FY24, with headline inflation declining to 20.7 percent y/y in March. Coordinated monetary and fiscal policies, along with lower global commodity prices, contribute to this trend. However, risks remain, including global oil price volatility and fiscal consolidation.
The Committee maintains a prudent approach, emphasizing positive real interest rates to support economic stability.
