The State Bank of Pakistan’s (SBP) Monetary Policy Committee (MPC) has decided to keep the policy rate unchanged, anticipating a decrease in inflation starting this month.
Maintaining the Status Quo
In April, the MPC increased the key policy rate by 100 basis points to a record high of 21% to curb inflation. The SBP has raised rates by a total of 1,150 basis points since January 2022.
Inflation Outlook
The SBP’s statement acknowledges that the higher inflation outcomes in April and May were in line with expectations. Both consumers and businesses have shown a sequential ease in inflation expectations. The committee anticipates subdued domestic demand due to tight monetary conditions, domestic uncertainty, and ongoing stress on the external account.
Based on the current trend and barring unforeseen developments, the MPC believes that inflation peaked at 38% in May 2023 and will begin to decline from June onwards.
Factors Influencing Inflation
Inflation in Pakistan remains broad-based, primarily driven by increased food prices. Core inflation, which indicates the second-round impact of higher food and energy prices and exchange rate depreciation, has maintained an upward trajectory, albeit at a slower pace. However, the central bank expects reduced demand-side pressures, easing inflation expectations, moderating global commodity prices, and the high base effect to contribute to a decline in inflation from June 2023 onwards.
Medium-Term Target
To achieve the medium-term target range of 5%–7% by the end of FY25, the MPC emphasizes the necessity of maintaining the current policy stance.
Recent Developments and Outlook
The MPC takes stock of various important developments, including the deceleration in real GDP growth, back-to-back surpluses in the current account balance, and the slightly contractionary fiscal stance outlined in the FY24 budget. Additionally, global commodity prices and financial conditions have eased recently, which is expected to continue in the near term.
The central bank highlights that the impact of substantial monetary tightening is still unfolding. It views the current monetary policy stance as appropriate to anchor inflation expectations and bring down inflation, contingent on effectively addressing domestic uncertainty and external vulnerabilities.
External and Fiscal Sectors
On the external sector, the SBP notes that the current account deficit has significantly reduced due to demand-compression policies and regulatory measures. The policy-induced contraction in imports has outweighed the decline in exports and remittances. However, debt repayments, lower fresh disbursements, and weak investment inflows continue to exert pressure on foreign exchange reserves.
The committee remains optimistic about the current account deficit remaining in check, considering relatively favorable commodity prices and a moderate domestic economic recovery in the coming year.
Regarding the fiscal side, the central bank observes that the fiscal deficit has slightly reduced during Jul-Mar FY23, with an improvement in the primary balance. However, there has been some deterioration in Q3 fiscal indicators due to an increase in non-interest current expenditures, mainly subsidies, and a deceleration in overall tax revenue. It foresees a further increase in the fiscal deficit in Q4.
The revised estimates for FY23 project a fiscal deficit of 7.0% and a primary deficit of 0.5% of GDP. The budget for FY24 aims for a fiscal deficit of 6.5% and a primary surplus of 0.4% of GDP.
The MPC advises strict adherence to the budget projections to contain inflationary and external account pressures.
In conclusion, the State Bank of Pakistan’s Monetary Policy Committee maintains its policy rate, expecting inflation to decline from June onwards. The central bank highlights the factors influencing inflation and emphasizes the importance of adhering to the budget projections to address economic challenges effectively.
Published in PakWeb, June 12th, 2023.
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