The State Bank of Pakistan (SBP) will convene on Friday (May 28, 2021) to announce the monetary policy for the next two months. We expect the SBP to keep the policy rate unchanged at 7% in the upcoming monetary policy statement.

To recall, the Monetary Policy Committee (MPC) convened the last meeting in Mar’21. It noted that improvement had been witnessed in the overall domestic recovery, which has aided consumer and business confidence. Therefore, in our view, SBP might consider keeping the rate unchanged to boost the domestic demand despite running a negative interest rate of ~2%. Moreover, the statement also hinted at a very gradual and measured monetary tightening stance when the need arises. It also highlighted that the core inflation continues to appear restrained, and although headline numbers have been inclining, inflation remains manageable. 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 actual interest rates remain negative in the medium term.

On the external front, Pakistan recorded a Current Account Deficit of USD 288mn in 3QFY21 against a deficit of USD 700mn recorded in the SPLY, marking a decline of 59% YoY. In the last month of 3Q (Mar’21), the country posted a Current Account Deficit (CAD) of USD 47mn compared to a surplus of USD 50mn recorded during Mar’20. On a YoY basis, the primary reason behind the deficit was a 50% YoY (USD 1,956mn) increase in total imports. However, total exports and remittances also increased by 41% YoY (USD 927mn) and 43% YoY (USD 820mn), respectively. During 9MFY21, the country’s surplus reached USD 959mn compared with a deficit of USD 4,147mn during the same period last year.

Courtesy – AHL Research