KARACHI: In accordance with prevailing market predictions, the State Bank of Pakistan (SBP) opted to keep the key interest rate steady at 22% during its fourth consecutive Monetary Policy Committee (MPC) meeting.

The decision reflects a strategic approach, allowing the effects of prior rate hikes to permeate the economy and address persistently high retail inflation.

The SBP’s monetary policy committee acknowledged the potential impact of the recent surge in gas prices on the inflation outlook. In a statement, the central bank noted, “The decision does take into account the impact of the recent hike in gas prices… the Committee viewed that this may have implications for the inflation outlook, albeit in the presence of some offsetting developments.”

The interest rate was elevated to 22% in an unscheduled meeting in June, serving as a final effort to secure a $3 billion bailout from the International Monetary Fund (IMF). This bailout was part of a broader reforms program designed to stabilize Pakistan’s complex $350 billion economy.

Pakistan has grappled with elevated price pressures, witnessing monthly consumer price index-based inflation surpassing 20% since June 2022 and reaching a record high of 38% in May 2023. Both the SBP and the IMF anticipate a gradual easing of inflation in the current financial year, concluding in June 2024. However, despite energy price hikes to meet reform targets, inflation remained at 29.2% in November.

The MPC expressed optimism that, barring significant increases in administered prices, headline inflation would notably decrease in the second half of FY24. The elevated borrowing costs have contributed to a sluggish economic growth rate of approximately 2%.

Nevertheless, investors have factored in the anticipated peak in interest rates, and optimism surrounds the successful completion of the IMF program, boosting stock markets and the currency.

In preparation for the IMF bailout, Pakistan committed to various measures, including revising its budget, demonstrating commitments to foreign funding, and raising electricity and natural gas prices.

The IMF has already disbursed $1.2 billion, with an additional $700 million set for release pending board approval on January 11.

Pakistan’s foreign reserves have shown improvement, reaching around $7 billion, enough to cover 1.4 months’ worth of imports, compared to $4.4 billion in July. The SBP expects that the successful completion of the first review of the ongoing IMF program will enhance financial inflows and bolster the foreign exchange reserves position, as mentioned in the recent statement.

Against this backdrop, Pakistan’s benchmark index KSE100 achieved a milestone by surpassing 66,000 points, trading at an all-time high. In the week ending December 8, it recorded a historic weekly return of 7.3%, gaining 4,532 points.

As the country approaches elections in February, leading candidates have expressed intentions to stimulate economic growth.