The State Bank of Pakistan (SBP) has chosen to keep the policy rate at 22%, citing the favorable outlook for the external and fiscal sectors as well as the impact of the recent increase in gas prices on inflation.
SBP To Remain the Policy Rate Unchanged at 22%
Following its bimonthly meeting, the Monetary Policy Committee (MPC) of the SBP made the announcement on Tuesday.
According to the MPC, higher-than-expected inflation in November caused by higher gas tariffs.
However, this was somewhat mitigated by lower global oil prices and increased agricultural produce availability.
In addition, the MPC stated that a decrease in inflation anticipated in the upcoming months and that the real interest rate is still positive.
The MPC further stated that, given continued fiscal restraint and planned foreign inflows, the current monetary policy stance would allow for the achievement of the inflation target of 5-7 percent by the end of FY25.
Key Drivers of GDP Growth
According to the MPC, the manufacturing and agricultural sectors’ recovery was the primary driver of the real GDP growth of 2.1 percent in Q1-FY24.
The MPC also noted that as exports and remittances rose and imports fell from July to October of FY24, the current account deficit shrank by 65.9 percent.
The MPC added that while expenditures were controlled, tax and non-tax revenues increased significantly from July to November of FY24, indicating an improvement in the fiscal indicators.
Due mostly to a decrease in the amount of currency in circulation, reserve money fell from June as well.
Foreign Exchange Reserves
Because of significant foreign exchange inflows in July, the SBP and the banking system’s net foreign assets have increased since June.
The quality of reserve money and broad money has improved as a result of this and the decline in net domestic assets since June.
The MPC further stated that the November 2023 year-over-year inflation rate of 29.2 percent increased by 3.2 percentage points due to the unanticipated increase in gas prices.
Furthermore, core inflation remained elevated throughout the month at 21.5 percent, barely declining from its peak of 22.7 percent in May 2023.
Despite recent improvements, businesses and consumers still have high expectations for inflation.
MPC Anticipation
The MPC still anticipates that the second half of FY24 will see a significant decline in headline inflation due to low aggregate demand, easing supply bottlenecks, moderation in international commodity prices, and a favorable base effect, barring another significant increase in administered prices.
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