KARACHI: The State Bank of Pakistan (SBP) announced today, following its Monetary Policy Committee (MPC) meeting, that it would maintain the policy rate at 22 percent. The MPC, in its October 30, 2023 Monetary Policy Statement, took into consideration various economic indicators and global factors in making this decision.
Inflation Projection and Economic Outlook
The MPC acknowledged that headline inflation had risen as expected in September 2023. However, it is projected to decline in October and continue on a downward trajectory, particularly in the second half of the fiscal year. While recent global oil price volatility and the impending gas tariff increase from November 2023 pose some risks to the inflation and current account outlook for FY24, there are offsetting factors to consider. These include targeted fiscal consolidation in Q1, improvements in the availability of key commodities, and the alignment of interbank and open market exchange rates.
Key Developments Since September Meeting
Several key developments were noted since the MPC’s September meeting. Encouraging initial estimates for Kharif crops are expected to have positive effects on various sectors of the economy. The current account deficit significantly narrowed in August and September, helping stabilize the SBP’s foreign exchange reserves. Fiscal consolidation remained on track, with improvements in fiscal and primary balances during Q1-FY24. While core inflation remained persistent, inflation expectations of consumers and businesses improved in recent surveys. Nevertheless, the volatile global oil prices and the Middle East conflict added uncertainty to the inflation outlook.
Monetary Policy Stance
Given these developments, the MPC emphasized the importance of continuing with a tight monetary policy stance. It reiterated that the real policy rate remains significantly positive on a 12-month forward-looking basis, which is considered appropriate to bring inflation down to the medium-term target of 5 to 7 percent by the end of FY25. The outlook is contingent on the continuation of fiscal consolidation and the timely realization of planned external inflows.
Real Sector Performance
Data on economic activity reaffirmed the MPC’s earlier expectation of moderate growth for the year. Notably, production estimates for major Kharif crops showed a considerable increase compared to the previous year, supported by improved fertilizer off-take and water availability. Other key activity indicators, including cement, POL, and auto sales, are showing signs of moderate recovery. Large-scale manufacturing (LSM) output indicated gradual improvement in the first two months of the year, with significant contributions from domestic-oriented sectors.
External Sector and Fiscal Sector
The MPC noted a substantial improvement in the current account balance, with a 58 percent year-on-year reduction in the deficit to $947 million in Jul-Sep FY24. Exports and workers’ remittances improved in September, while reforms in the exchange market and administrative actions against illicit activities boosted FX market sentiments and liquidity. Fiscal indicators for Q1-FY24 improved compared to the same period last year, with a better fiscal deficit and primary balance, reflecting enhanced revenue collection and restrained spending.
Money and Credit Growth
The broad money (M2) growth decelerated due to a slowdown in private sector credit and commodity operations financing. The reserve money growth also slowed down. Net Foreign Assets (NFA) of SBP and the banking system expanded due to significant FX inflows in July, while Net Domestic Assets (NDA) contracted, improving the composition of M2 and reserve money. It is expected that fiscal consolidation and anticipated external inflows will create room for credit to the private sector and enhance the NFA of the banking system.
In September, headline inflation surged to 31.4 percent year-on-year. The MPC anticipates a significant decline in inflation in October due to adjustments in fuel prices, easing food commodity prices, and a favorable base effect. The Committee expects inflation to decrease substantially from the second half of FY24, with some upside risks stemming from global oil price fluctuations and gas tariff increases. Core inflation remains elevated, but fiscal policies and improved food commodity availability are expected to support efforts to lower inflation.
The SBP’s decision to maintain the policy rate underscores its commitment to ensuring economic stability and managing inflation amid both domestic and international challenges.