The State Bank of Pakistan (SBP) in its latest Monetary Policy Statement (MPS) has increased the Policy Rate by 150bps from 7.25% to 8.75%, which is higher than market expectations.

Reason for tightening: Risks related to inflation and the balance of payments have increased while the outlook for growth has continued to improve. The amplified risks related to inflation and balance of payments stem from both global and domestic factors. There are also emerging signs of demand-side pressures on inflation. With respect to the balance of payments, the current account deficits (CAD) in Sep-21 and Oct-21 have been larger than anticipated, reflecting both rising oil and commodity prices and buoyant domestic demand.

New forward guidance: Looking ahead, the MPC re-iterated that the end goal of mildly positive real interest rates remains unchanged and, given today’s move, expects to take measured steps to that end. Additionally, there will be another MPC meeting on 14th Dec-2021.

Previous forward guidance: Looking ahead, in the absence of unforeseen circumstances, the MPC expects monetary policy to remain accommodative in the near term, with possible further gradual tapering of stimulus to achieve mildly positive real interest rates over time. Gradual tapering would be informed by updated information on the continued strength of demand growth and the stance of fiscal policy, amongst other factors.

Upward risks to previous estimates: The CAD for FY22 is expected to modestly exceed the previous forecast of 2-3% of GDP. Similarly, additional upside risks to the average inflation forecast of 7-9% in FY22 are also likely.

Courtesy – AHCML Research