SBP’ holds interest rate at 22% 30 Oct 2023
The State Bank of Pakistan (SBP) made the decision on Monday to maintain the key policy rate at 22%’ aligning with market expectations. The next announcement regarding this rate is scheduled for December 12.
In an official statement’ the central bank revealed that the Monetary Policy Committee (MPC) had resolved to keep the policy rate at 22 percent during its meeting today. The decision was influenced by the observation that headline inflation in September 2023 rose to 31.4%’ as was anticipated. This inflation rate is a significant factor in determining the key policy rate.
However’ the SBP anticipates a decline in inflation in October’ followed by a continued downward trajectory’ particularly in the latter half of the fiscal year. The MPC foresees a substantial decrease in inflation for October’ attributed to reductions in fuel prices’ easing costs of major food commodities’ and a favorable base effect. The committee reconfirmed its earlier assessment that inflation is expected to decrease significantly in the second half of FY24’ barring any significant adverse developments.
While acknowledging the recent volatility in global oil prices and the increase in gas tariffs from November’ which present some risks to the FY24 inflation outlook and the current account’ the central bank also pointed out offsetting factors. These include targeted fiscal consolidation in Q1’ improvements in the market availability of key commodities’ and the alignment of interbank and open market exchange rates.
The MPC noted four key developments since its September meeting:
- Encouraging initial estimates for Kharif crops that are expected to have positive effects on other key sectors of the economy.
- A substantial narrowing of the current account deficit in August and September’ which has contributed to stabilizing the SBP’s foreign exchange reserves position despite limited external financing in these two months.
- Fiscal consolidation remaining on track’ with improvements in both fiscal and primary balances during Q1-FY24.
- While core inflation remains stubborn’ inflation expectations of both consumers and businesses have improved in the latest pulse surveys.
In light of these developments’ the MPC underscored the importance of maintaining a tight monetary policy stance. The committee restated its previous viewpoint that the real policy rate is significantly positive on a 12-month forward-looking basis and is well-suited to bring down inflation to the medium-term target of 5-7 percent by the end of FY25. However’ it was noted that this outlook hinges on continued fiscal consolidation and the timely realization of planned external inflows.
Since the last MPC meeting on September 14’ where the interest rate remained unchanged’ several developments have occurred’ including the appreciation of the rupee’ a decrease in petrol prices’ expected inflation’ a reduction in the current account deficit’ and an improvement in forex reserves.
Raza Jafri’ Head of Equities at Intermarket Securities’ indicated that the SBP’s decision to keep the policy rate unchanged at 22% was expected’ especially on the eve of the International Monetary Fund (IMF) review. He also mentioned that the SBP appears to be laying the groundwork for potential interest rate cuts in the future’ particularly if the IMF review proves successful and international oil prices remain stable.
Conclusion
The State Bank of Pakistan’s decision to maintain the key policy rate at 22% reflects a carefully weighed response to economic conditions and expectations. The central bank’s focus on inflation and its commitment to fiscal consolidation are evident in this decision. The anticipation of a decline in inflation’ driven by factors like lower fuel prices and improved market availability of key commodities’ offers hope for a more stable economic outlook in the coming months.
The MPC’s recognition of various positive developments’ including strong Kharif crop estimates’ narrowing current account deficits’ and fiscal consolidation’ underscores the multifaceted approach required to ensure economic stability. However’ it is essential to acknowledge that potential risks’ such as volatile global oil prices and increased gas tariffs’ are on the horizon.
The statement also alludes to the possibility of interest rate cuts in the future’ contingent on a successful IMF review and stable international oil prices. This signifies the flexibility in the central bank’s approach as it navigates the complexities of monetary policy.
Overall’ the SBP’s decision not only reflects a commitment to controlling inflation and fostering economic stability but also suggests a willingness to adapt to evolving economic circumstances. As the global and domestic economic landscapes continue to shift’ the SBP remains vigilant’ ready to respond to emerging challenges and opportunities.
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