The monetary policy committee is set to commence its next meeting on Sept 14, 2023, and we expect the SBP to increase the policy rate by 150bps to 23.5% in this meeting. During its meeting on July 31st, 2023, SBP kept the policy rate unchanged. The MPC acknowledged reduced economic uncertainty since the last meeting and successfully resolved near-term external sector challenges, which boosted investor confidence. However, it highlighted some emerging upside risks to inflation.

In Sep’s policy, we believe SBP might consider increasing interest rates as a precautionary measure to address the country’s persistently high levels of inflation. During 2MFY24, inflation remained alarmingly high, averaging around 27.8%. This ongoing inflationary trend is expected to persist, with our forecasts indicating an average inflation rate of ~28.5% until Dec’23, particularly following an anticipated peak in Sep’23. Several significant factors are contributing to this sustained inflationary pressure, including i) the depreciation of the PKR against USD, ii) the surge in global oil prices, including Arab Light (up 5.2% since the last MPS), and iii) elevated food prices. Additionally, there are expectations of a substantial increase in gas tariffs of ~40-45%, which could further amplify inflationary pressures.

Moreover, the rise in international oil prices has not only contributed to inflation. Still, it has also added considerable stress to Pakistan’s current account deficit, given the nation’s heavy reliance on oil imports. The current economic landscape of Pakistan is characterised by a growing current account deficit due to a shift in the country’s import policy, moving towards a more open trade policy. This shift has led to a significant import surge, with a 30% MoM increase in July ’23 alone. Moreover, the depreciation of the PKR against the USD has been substantial (~6%) since the last MPS announcement in July ’23, which is expected to intensify the inflationary pressures further.

Courtesy- AHL Research