KARACHI: The State Bank of Pakistan (SBP) maintained its benchmark interest rate, which represents the cost of borrowing from banks, at 22 percent. This decision was reached following a meeting of the Monetary Policy Committee (MPC) and reaffirmed the policy rate at 22 percent.
In its statement, the MPC emphasized the importance of continuing the tight monetary policy stance and highlighted that the “real policy rate remains significantly positive when looking ahead, with the aim of reducing inflation to a range of 5 to 7 percent by the end of the fiscal year 2025.”
The statement also stressed that achieving the medium-term inflation target depends on sustained fiscal consolidation and the timely realization of planned external funds. The committee acknowledged the expected increase in headline inflation in September 2023, which is projected to decline in October and continue on a downward trajectory, especially in the second half of the fiscal year.
The MPC recognized some potential risks to the fiscal year 2024 outlook, including recent global oil price volatility and increased gas tariffs starting in November 2023. However, it also noted offsetting factors, such as targeted fiscal consolidation in the first quarter, improved availability of essential commodities in the market, and the alignment of interbank and open market exchange rates.
The committee pointed out significant developments since its September meeting, including promising initial estimates for Kharif crops and a positive impact on other key sectors. It also highlighted a considerable reduction in the current account deficit in August and September, contributing to the stabilization of the SBP’s foreign exchange reserves, despite limited external financing during these months.
Fiscal consolidation remained on track, with improvements in fiscal and primary balances in the first quarter of FY24. The MPC noted that while core inflation remained persistent, the inflation expectations of both consumers and businesses improved in recent surveys.
However, the committee expressed concerns about the volatility of global oil prices and the ongoing Middle East conflict, which add uncertainty to the outlook. In light of these developments, the MPC reiterated the need to maintain the tight monetary policy stance, given the significantly positive real policy rate on a 12-month forward-looking basis, to achieve the medium-term inflation target of 5 to 7 percent by the end of FY25, contingent on continued fiscal consolidation and timely realization of planned external funds.
The statement mentioned that recent economic activity data supported the MPC’s expectation of moderate economic growth for the year. It highlighted gradual improvements in large-scale manufacturing output and domestic-oriented sectors contributing positively.
The SBP remained optimistic about a decrease in inflation in the coming months, which would help mitigate major negative factors. However, it acknowledged that global oil price fluctuations and substantial gas tariff increases were exerting inflationary pressure.
This decision comes ahead of the International Monetary Fund’s (IMF) review for the release of the second tranche of $710 million. The central bank has raised its policy rate by a cumulative 1,500 basis points since October 2021 to combat rising inflation and support the external balance. The rate has remained unchanged since July 2023, as per the previous meeting held in July when the State Bank of Pakistan kept the interest rate steady at 22 percent.
