SBP to maintain policy rate at 15%

KARACHI: State Bank of Pakistan (SBP) on Monday decided to maintain its policy (interest) rate at 15 percent for next two months.                                  

SBP’s Monetary Policy Committee, in its meeting held here, noted the continued deceleration in economic activity as well as the decline in headline inflation and the current account deficit since its last meeting, SBP monetary policy statement said.

It also noted that the recent floods have altered the macroeconomic outlook and a fuller assessment of their impact is underway. Based on currently available information, the MPC was of the view that the existing monetary policy stance strikes an appropriate balance between managing inflation and maintaining growth in the wake of the floods.

On the one hand, inflation could be higher and more persistent due to the supply shock to food prices. It is important to ensure that this additional impetus does not spillover into broader prices in the economy. However, growth prospects have weakened, which should reduce demand-side pressures and suppress underlying inflation.

In light of these offsetting considerations, the MPC considered it prudent to leave monetary policy settings unchanged at this stage.

Since the last meeting, the MPC noted several key developments: First, the desired moderation in economic activity has become more visible and entrenched, signaling that the tightening measures implemented over the last year are gaining traction. With growth likely to slow further in the aftermath of the floods, this tightening will need to be carefully calibrated going forward.

Second, after peaking in August as expected, headline inflation fell last month due to an administrative cut in electricity prices. However, core inflation continued to drift upwards in both rural and urban areas.

Third, the current account and trade deficits narrowed significantly in August and September, respectively, and the Rupee has recouped some of its losses following the recent depreciation.

Fourth, the combined 7th and 8th review under the on-going IMF program was successfully completed on August 29th, releasing a tranche of $1.2 billion.

The MPC discussed the post-flood macroeconomic outlook, noting that projections are still preliminary and would become firmer after the flood damage assessment being conducted by the government is finalized.

Based on currently available information, GDP growth could fall to around 2 percent in fiscal year 2022-23 , compared to the previous forecast of 3-4 percent before the floods.

Meanwhile, higher food prices could raise average headline inflation over the same period; somewhat above the pre-flood projection of 18-20 percent.

The impact on the current account deficit is likely to be muted, with pressures from higher food and cotton imports and lower textile exports largely offset by slower domestic demand and lower global commodity prices.

As a result, any deterioration in the current account deficit is expected to be contained, still leaving it in the vicinity of the previously forecast 3 percent of GDP.