The monetary policy on November 25. Markets expect SBP to keep the policy rate unchanged at 15%.

The monetary policy committee of SBP will convene on Friday (November 25, 2022). We expect SBP to keep the policy rate unchanged at 15% in the upcoming monetary policy. To recall, in the last MPS too, policy rate was kept unchanged at 15% and this stance was taken in lieu of a continued deceleration in economic activity as well as a decline detected in headline inflation since the last meeting held in Aug’22. The MPC further stated that the existing rate prudently reflected a balance between maintaining growth post floods and managing inflation.

The recent Balance of Payment numbers show that Pakistan’s current account deficit decreased by 37% YoY to USD 2.2bn during 1QFY23, as against a deficit of USD 3.5bn during the same period last year. This YoY decline is mainly on the back of lower imports and jump in exports. 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 compared to FY22’s CAD.

As a result of a contained CAD and disbursement from ADB (~USD 1.5bn), the weakening of PKR against USD showed moderation since last MPS, depreciating 2.2%. Moreover, SBP believes that Pakistan’s external financing needs should be more than fully met in FY23 aided by rollovers by bilateral official creditors, new lending from multilateral creditors, and a combination of bond issuances, FDI and portfolio inflows. Thus, pressure on the Rupee should lessen while SBP’s FX reserves should assume the upward trajectory which currently stand at USD 8.0bn (11-Nov-2022). 

In addition, another positive development since the last MPC meeting has been the decline in international prices of major commodities such as WTI (-8.6%), Coal (-21.5%), Brent (-4.8%), Steel (-3.8%), Wheat (-8.4%) and Arab Light (-6.6%). This bodes well for our external account position, hence providing much needed relief to our trade numbers.

On the domestic front, most of the high frequency (demand) indicators showed moderation to decline in growth on YoY basis. Measures taken by the monetary and fiscal authorities to slow down the aggregate demand along with rising cost of doing business led to decline of LSMI as evident from decline in production numbers during 1QFY23 of textile (-3.3% YoY), food (-6.2% YoY), automobile (-32.8% YoY) and petroleum (-18.9% YoY). Moreover, with recent flood damaged agriculture growth, lower yields of cotton and seasonal crops could weigh on growth this year.

As mentioned in the last MPS, SBP is closely monitoring the inflation trajectory. On the inflationary front, the headline inflation continues to remain in the double digit since Nov’21 mainly on the back of uptick in food and energy prices. In the month of Oct’22, headline inflation clocked-in at 26.6% YoY. However, on MoM basis, inflation increased by 4.71% mainly due to FCA adjustments and food prices’ hike. With this, average inflation for 4MFY23 clocks-in at 25.5% compared to 8.74% in 4MFY22. Moreover, headline inflation is expected to have peaked in the out-going quarter of FY23 and is likely to come down with high base-effect kicking-in.



Courtesy – AHL Research



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