KARACHI: The State Bank of Pakistan (SBP) on Tuesday decided to maintain the key policy rate at 9.75 per cent for the next two months.
The central bank in a statement said the decision reflected the Monetary Policy Committee’s (MPC) view that the outlook for inflation has improved; following the cuts in fuel prices and electricity tariffs announced last week, as part of the government’s relief package.
At the same time, high frequency indicators suggest that the growth continues to moderate to a more sustainable pace.
This moderation should help keep at bay the demand side pressures on inflation and contain non-oil imports, notwithstanding the significant uncertainty about the future path of the global energy and food prices due to the Russia-Ukraine conflict.
Since the last meeting on January 24, 2022, the headline inflation moderated in February to 12.2 per cent (Y-o-Y). Inflation in February would have been noticeably lower were it not for abnormal increases in a few perishable items.
Accordingly, the core inflation also fell in the urban areas and inflation expectations remained stable, suggesting that the second-round effects from higher commodity prices remain contained.
On the external front, despite the rise in the global prices, the February trade deficit witnessed a further 10 per cent contraction (M-o-M) on top of the 29 per cent decline recorded in January, confirming the slowdown in the domestic demand.
While the current account deficit rose in January, this largely reflected the lumpy imports of oil, vaccines and other items financed through loans and suppliers’ credit. Excluding these imports, the deficit would have been around $1 billion less, suggesting that the underlying trend in the current account balance is also moderating.
Looking ahead, the Monetary Policy Committee noted that while the current real interest rates on a forward-looking basis are appropriate to guide inflation to the medium-term range of 5 to 7 per cent, support growth, and maintain external stability, the Russia-Ukraine conflict has introduced a high degree of uncertainty in the outlook for the international commodity prices and global financial conditions.
Continued adverse conditions on these fronts could pose challenges to the outlook for the current account deficit and inflation expectations, which could necessitate changes in the policy rate. Since the Russia-Ukraine situation remains fluid, the Monetary Policy Committee noted that it was prepared to meet earlier than the next scheduled meeting in late April, if necessary, to take any timely and calibrated action to safeguard the external and price stability.
In reaching its decision, the committee considered key trends and prospects in the real, external and fiscal sectors and the resulting outlook for the monetary conditions and inflation.
In January, there was a sharp and broad-based decline in imports, including energy imports, to $6.1 billion from $7.6 billion in December based on the Pakistan Bureau of Statistics (PBS) data.
Imports declined further in February, while exports rose, resulting in a 38 per cent contraction in the trade deficit, compared with its peak last November. Around three-fourths of the rise in imports this year is estimated to stem out from higher prices coupled with the negative contribution from volume growth in January.
These trends suggest that the demand-led pressures on the current account are declining. While the current account deficit rose to $2.6 billion, this included a sizeable contribution from imports financed through loans and suppliers’ credit, including oil and vaccines, the SBP said.
At around 2 per cent of GDP, the fiscal deficit during the first half of FY22 was almost the same as last year. The Federal Board of Revenue’s (FBR) tax collection grew 30 per cent (Y-o-Y) during July-February FY22, in part due to a depreciated exchange rate and higher imports than last year, as well as strengthened tax collection efforts.
This offsets the decline in non-tax revenues due to lower petroleum development levy revenues and increased spending, including on subsidies, grants and provincial Public Sector Development Programme.
The SBP said that the headline inflation fell to 12.2 per cent in February from 13 percent (Y-o-Y) in January, driven by a slowdown in the energy price inflation.
The contribution to inflation from food prices rose, reflecting higher prices for tomatoes, fresh vegetables, chicken and vegetable ghee.
Meanwhile, core inflation ticked down in the urban areas and rose in the rural areas, while inflation expectations of both consumers and businesses remained broadly unchanged.
The Monetary Policy Committee continues to expect inflation to average between 9 to 11 per cent this fiscal year before declining towards the medium-term target range of 5 to 7 per cent in FY23, as the global commodity prices normalise. This baseline outlook is subject to risks from the path of global prices, domestic wage developments and the fiscal policy stance.
The committee will continue to carefully monitor the developments affecting the medium-term prospects for inflation, financial stability and growth.
