Policy rate likely to remain unchanged

The monetary policy committee of SBP will convene on Monday (August 22, 2022). We expect SBP to keep the policy rate unchanged at 15% in the upcoming monetary policy. To recall, in the monetary policy meeting held in Jul’22, the State Bank of Pakistan (SBP) increased the benchmark policy rate by 125bps to 15% (highest since March 1999). Moreover, rates on EFS and LTFF loans were linked to the policy rate, at a 500bps discount though (to 10%), so as to continue incentivizing exports while ensuring monetary tightening penetrates effectively. Together, these steps were taken to ensure a “soft landing of the economy” at a time when global dynamics remained challenging, while also cooling down economic activity, steering inflation towards expectations and providing support to the Rupee in the backdrop of multi-year high imports and record imports.

A key development in the economy recently witnessed is on the external front. The recent trade numbers reported by the PBS show that Pakistan’s trade deficit shrank by 18% YoY | 47% MoM during the month of Jul’22 mainly on the back of decline in import bill. With the measures taken by the authorities to curb import along with decline in international commodity prices, current account deficit is likely to remain lower in FY23. In its last Monetary Policy (Jul’22), even SBP highlighted the shrinking of CAD going forward, projecting it to come down to 3% of GDP in FY23 as imports show moderation whereas exports and remittances remain resilient. In addition, another positive development since the last MPC meeting has been the decline in international prices of major commodities such as WTI (-12%), Coal (-12%), Brent (-9%), Steel (-8%) and Arab Light (-5%). This bodes well for our external account position, hence providing much needed relief to our trade numbers.

Courtesy – AHL Research

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