SBP decides to keep key policy rate unchanged at 22%

The State Bank of Pakistan (SBP) has decided to maintain the key policy rate at 22%, a move that came as a surprise to the market. The announcement was made by SBP Governor Jameel Ahmed after the Monetary Policy Committee (MPC) meeting.

During a press conference, Governor Ahmed projected a growth rate of 2% to 3% for the upcoming year. He also revealed that the government has removed all import restrictions, and as a result, Pakistan’s foreign exchange reserves saw a significant increase of $4.2 billion in July. This boost came after the country received funds from the International Monetary Fund (IMF) and other friendly nations.

The SBP governor mentioned that the foreign exchange reserves currently held by the central bank are at $8.2 billion, and he expects them to further improve by December this year.

SBP Governor Ahmed said more loans will be rolled over in the coming months, adding that according to the MPC inflation is expected to come down.

The SBP has raised its key policy rate by 12.25 percentage points since April 2022, mainly to curb soaring inflation.

The state bank held rates steady in June saying inflation had peaked at 38% in the preceding month. But before the end of the month, it raised rates by 100 bps at an emergency meeting in an effort to secure IMF funds, citing a “slightly deteriorated inflation outlook”.

The IMF urged Pakistan in a staff report earlier in July to continue its monetary tightening cycle, a week after the lender approved the new $3 billion bailout arrangement with Pakistan which helped it avert a debt default.

In a statement issued following the meeting, the MPC noted that the economic uncertainty has decreased since the last meeting, whereas near-term external sector challenges have been largely addressed and investor confidence has shown improvement.

While some upside risks to the inflation outlook have emerged, the committee also took note of the expected lagged impact of the accumulated monetary tightening so far, budgeted fiscal consolidation, and the tepid growth outlook for FY24, it added.

The MPC particularly noted that year-on-year inflation is likely to remain on downward path over the next 12 months, which implies a significant level of positive real interest rate.

Since the MPC meeting held on June 26, several important developments have influenced the short-term macroeconomic outlook.

First, Pakistan has secured a nine-month Stand-By Arrangement (SBA) with the IMF that has helped address immediate external sector stability concerns by supporting the foreign exchange reserves.

With the disbursement of first tranche under the SBA and $3 billion in bilateral support, the SBP’s reserves increased from $4.5 billion at the end of June 2023 to $8.2 billion as of July 21, 2023.

Second, on top of the additional tax measures introduced at the time of approval of the budget, the government has notified an increase in electricity tariffs which would contribute to inflation in the coming months.

Third, global commodity prices have somewhat increased but are still lower than their recent peak. Moreover, the IMF in its July 2023 World Economic Outlook has slightly raised its projection of global growth this year while leaving the 2024 growth projection unchanged.

In light of these developments, the MPC stressed on maintaining an appropriately tight monetary policy stance with positive real interest rates on forward looking basis to keep inflation and its expectation on downward path so as to achieve the medium-term inflation target of 5–7% by end-FY25.