The monetary policy committee of State Bank of Pakistan (SBP) will convene on Monday (Sep 20, 2021) to announce the monetary policy for the next two months. We expect the SBP to keep policy rate unchanged at 7% in the upcoming monetary policy statement.

To recall, the MPC convened last in Jul’21 and noted that further improvement has been witnessed in the overall domestic recovery, while a decline was seen in food prices and core inflation. With consumer and business confidence at multi-year highs and inflation expectations trimmed, SBP projects growth for the next year at 4-5% against 3.9% in FY21.

After averaging above 9% in 1HCY21, primarily on account of higher supply-side push from perishable food items and tariff adjustments – the outlook for inflation (particularly core) seems rather tamed, with high probability of meeting SBP headline inflation target of 7% – 9% in FY22. Moreover, as per SBP, inflation is likely to hover within the 5-7% range in the medium-term. Therefore, it seems likely that the central bank would let the real interest rates remain negative in the medium term.

On the external front, Current Account for the month of Jul’21 posted a deficit of USD 773mn compared with a surplus of USD 583mn during Jul’20. The primary reason for deficit during Jul’21 was 41% YoY jump in imports and a decline of 2% in remittances. Exports, however, showed improvement and clocked-in 17% YoY higher during Jul’21. Total imports during Jul’21 were USD 6.1bn while exports stood at USD 2.7bn. On MoM basis, CAD came down 52% from last month’s deficit of USD 1.6bn. Total imports and exports, both depicted a negative growth MoM, down 14% and 11%, respectively. With this, the Balance of Trade recorded a deficit of USD 3,371mn during Jul’21 compared with a deficit of USD 1,987mn in Jul’20, an increase of 69% YoY. However, on MoM basis, Balance of Trade posted a decline of 17%.

Courtesy – AHL Research