KARACHI:
In line with market expectations, the central bank on Tuesday left its key interest rate unchanged at a record high 22% ahead of the International Monetary Fund’s (IMF) board meeting to approve the next loan tranche of $700 million in January. 2024.
It was the fourth consecutive monetary policy in the past six months when the bank made no change to the policy rate, keeping policy tight in part because of high inflation. The central bank pointed out that the recent increase in natural gas prices was higher than its expectation, pushing inflation to a peak of 29.2% in November 2023. It predicted that the fall in international commodity prices, including the prices of of oil, would offset the impact of the increase in the price of natural gas.
Avoid showing the average inflation indication for the current fiscal year in the monetary policy statement.
Topline Research quoted State Bank of Pakistan (SBP) Governor Jameel Ahmad as telling an analyst briefing in a post-monetary policy announcement that the bank “reviews its inflation indication only twice a year” – in July and January, hinting that it would assess inflation in the next monetary policy due in January 2024.
design: Ibrahim Yahya
Earlier, the bank forecast average inflation at 20-22%, a forecast that remains unchanged from July 2023. The policy rate is a tool at the central bank’s disposal to control inflation, which is necessary to achieve a sustainable economic development.
The SBP raised the policy rate by a cumulative 15 percentage points over a 27-month period to 22% in June 2023.
Financial experts believe the policy rate has peaked and expect the bank to start cutting it from calendar year 2024, possibly from March, as the bank predicts a quick slowdown in inflation in the second half (Jan-Jun) of 2024 .
The market is forecasting a seven percentage point cut in the policy rate to 15% by December 2024 in an effort to boost economic activity to achieve modest growth of 2-3% in 2024. Insight Research quoted the SBP governor as saying that Pakistan had to repay a net principal of $4.3 billion in the remaining seven months of the current financial year.
According to Topline Research, Governor Ahmad said the total external funding requirement for FY24 was estimated at $24.6 billion, of which $5.4 billion had already been disbursed. The SBP estimated the conversion at $12.4 billion, of which $9 billion had already been committed.
The IMF expects Pakistan’s foreign exchange reserves to reach $9 billion by June 2024. Its country report will be released after the board meeting in January where revised numbers may be provided, the research house said.
Reading PSX rebounds strongly on policy rate status quo
The latest monetary policy statement added that the State Bank decided to keep the policy rate at 22%. “The decision takes into account the impact of the recent increase in natural gas prices on inflation in November, which was relatively higher than the MPC’s (monetary policy committee) earlier expectations. “The committee considered that this may have an impact on the outlook for inflation, albeit in the presence of some offsetting developments, particularly the recent decline in international oil prices and improved availability of agricultural products.”
In addition, the committee assessed that the real interest rate continued to be positive on a twelve-month forward basis and that inflation was expected to remain on a downward path. Barring a further significant increase in administrative prices, the MPC continues to expect headline inflation to ease significantly in the second half (Jan-Jun) of 2014 due to subdued aggregate demand, easing of supply constraints, restraint in international oil prices commodities and the favorable base effect.
He noted several key developments since his October meeting. First, the successful completion of a staff-level agreement on the first review under the IMF Stand-By Arrangement (SBA) will unlock financial inflows and improve SBP’s foreign exchange reserves. Second, the quarterly gross domestic product (GDP) growth result for 1Q24 remained in line with the MPC’s expectations for a moderate economic recovery.
Third, recent surveys of consumer confidence and business confidence have shown an improvement in sentiment. “Finally, core inflation remains at high levels and is only gradually declining.” Taking stock of these developments, the committee assessed that the current stance of monetary policy was appropriate for achieving the 5-7% inflation target by the end of the 25th year.
He reiterated that the assessment is also dependent on continued targeted fiscal consolidation and timely implementation of planned external inflows. The MPC considered that the recovery in real GDP over the 24th year was expected to remain modest. Real GDP grew by 2.1% in the first quarter of 2014 compared to 1% in the corresponding quarter of the previous year.
In line with earlier expectations, the recovery in the agricultural sector was the main driver of growth. The manufacturing sector also recorded a modest recovery, with growth in large-scale manufacturing turning positive after contracting in the previous four quarters.
Published in The Express Tribune, December 13u2023.
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