In its latest monetary policy meeting today, the State Bank of Pakistan (SBP) has kept the benchmark policy rate unchanged at 9.75%. Moreover, the Committee no longer targets mildly positive interest rates as it believes the current levels appear appropriate for the economy. Measures needed to keep economic growth sustainable have already been undertaken, such as a cumulative 275bps hike, higher bank cash reserve requirements, regulatory tightening of consumer finance, and curtailment of non-essential imports.

Key basis behind the decision includes:

Various measures have restrained demand since the last MPC meeting in Dec’21, which has improved inflation outlook.

While Inflation remains high on a YoY basis with headline CPI in Dec’21 at 12.28%, it remained flat on a MoM basis vs. 3% jump in Nov’21. Although the committee believes CPI for upcoming months could be higher due to base effect, over time inflationary pressure will recede.

Current Account Deficit (CAD) has not shown visible growth since Nov’21 whereas it is forecast that the non-oil current account balance will achieve a small surplus for FY22.

Recently enacted Finance Supplementary Act 2022 will help contain the fiscal deficit going forward. This will keep demand growth moderate and hence, bring down the inflation for FY23.

 Courtesy – AHL Research