SBP keeps policy rate unchanged at 15 percent

SBP keeps policy rate unchanged at 15 percent

KARACHI (Dunya News) – The State Bank of Pakistan (SBP) on Monday decided to keep the interest rates unchanged at 15 percent.

In its meeting held in Karachi on Monday, the Monetary Policy Committee (MPC) decided to maintain the policy rate at 15 percent, said a statement. To cool the overheating economy and contain the current account deficit, the policy rate has been raised by a cumulative 800 basis points since last September, some temporary administrative steps have recently been taken to curtail imports, and strong fiscal consolidation is planned for FY23. These actions are expected to work their way through the system over the coming months. With recent inflation developments in line with expectations, domestic demand beginning to moderate and the external position showing some improvement, the MPC felt that it was prudent to take a pause at this stage. Looking ahead, the MPC intends to remain data-dependent, paying close attention to month-on-month inflation, inflation expectations, developments on the fiscal and external fronts, as well as global commodity prices and interest rate decisions by major central banks.

Since the last meeting, the MPC noted three key domestic developments. First, headline inflation rose further to 24.9 percent in July, with core inflation also ticking up. This was expected given the necessary reversal of the energy subsidy package—effects of which will continue to manifest in inflation out-turns throughout the rest of the fiscal year—as well as momentum in the prices of essential food items and exchange rate weakness last month. Second, the trade balance fell sharply in July and the Rupee has reversed course during August, appreciating by around 10 percent on improved fundamentals and sentiment. Third, the Board meeting on the on-going review under the IMF program will take place on August 29th and is expected to release a further tranche of $1.2 billion, as well as catalyzing financing from multilateral and bilateral lenders. In addition, Pakistan has also successfully secured an additional $4 billion from friendly countries over and above its external financing needs in FY23. As a result, FX reserves will be further augmented through the course of the year, helping to reduce external vulnerability.

In terms of international developments, the MPC noted that both global commodity prices and the US dollar have fallen in recent weeks, in response to signs of a sharper than anticipated slowdown in global growth and nascent market expectations that the US Federal Reserve tightening cycle may be less aggressive than previously anticipated. In contrast to the trend since last summer, more emerging market central banks have started to hold policy rates in their recent meetings. This suggests that globally, risks may be shifting slightly from inflation toward growth, although this remains highly uncertain at this stage. On balance, the MPC noted that some greater slowdown in global growth would not be as harmful for Pakistan as for most other emerging economies, given the relatively small share of exports and foreign private inflows in the economy. As a result, both inflation and the current account deficit should fall as global commodity prices ease, while growth would not be as badly affected