The Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) has announced its decision to maintain the policy rate at 22 percent for the next two months. This decision was made public on October 30, 2023.
The MPC noted several key developments since its meeting in September that influenced this decision. Firstly, the initial estimates for Kharif crops were promising and are expected to positively impact other crucial sectors of the economy. Secondly, the current account deficit saw a significant reduction in August and September, aiding in stabilizing the SBP’s foreign exchange reserves position despite lukewarm external financing during these months.
Fiscal consolidation also remained on track, with both fiscal and primary balances showing improvement during Q1-FY24. While core inflation remains persistent, inflation expectations of both consumers and businesses showed improvement in recent surveys. However, global oil prices continue to be volatile, and the ongoing conflict in the Middle East adds to the uncertainty of its outlook.
Despite these challenges, the MPC emphasized the need to continue with the tight monetary policy stance. The committee reiterated its earlier view that the real policy rate is significantly positive on a 12-month forward-looking basis and is appropriate to bring inflation down to the medium-term target of 5 – 7 percent by the end of FY25.
The MPC also noted that headline inflation rose as expected in September 2023 but is projected to decline in October and then maintain a downward trajectory, especially in the second half of the fiscal year.
The recent volatility in global oil prices and the increase in gas tariffs from November 2023 pose some risks to the FY24 outlook for inflation and the current account. However, the committee also noted some offsetting factors, including targeted fiscal consolidation in Q1, improvement in market availability of key commodities, and the alignment of interbank and open market exchange rates.
The decision to maintain the policy rate at 22 percent reflects the SBP’s commitment to ensuring economic stability amidst global uncertainties.