SBP keeps policy rate unchanged at 22%

The decision was made in accordance with market expectations because the rate pause was widely supported by market players.

The Committee noted that while investor confidence has improved and near-term external sector problems have been mostly handled, economic uncertainty has decreased since the last meeting.

While the Committee noted that there are significant upside risks to the inflation forecast, it also noted the anticipated lag time of the cumulative monetary tightening thus far, budgeted fiscal reduction, and the muted growth estimate for FY24.

The MPC also underlined that a significant level of positive real interest rate is implied by the likelihood that year-over-year (YoY) inflation will continue to decline over the ensuing 12 months.

The short-term macroeconomic outlook has been impacted by a number of significant events that have occurred since the MPC meeting on June 26.

First, by boosting its foreign exchange reserves, Pakistan was able to negotiate a nine-month Stand-By Arrangement (SBA) with the IMF, which has assisted in addressing urgent external sector stability issues.

The SBP's foreign exchange reserves climbed from $4.5 billion at the end of June 2023 to $8.2 billion as of July 21, 2023, thanks to the delivery of the first tranche under the SBA and $3 billion in bilateral support.

Second, in addition to the additional tax measures put in place at the time the budget was approved, the government has announced a rise in electricity rates that will cause inflation in the upcoming months.

Third, although they have slightly risen, global commodity prices are still below their most recent peak.

Fourth, the IMF modestly increased its forecast for global growth this year in its July 2023 World Economic Outlook while maintaining its forecast for growth in 2024.

The MPC highlighted the importance of maintaining a suitably tight monetary policy stance with positive real interest rates on a forward-looking basis in light of these developments in order to keep inflation and expectations on a downward trend and reach the medium-term inflation target of 5 - 7% by the end of FY25.

Real Estate

The most recent high-frequency indicators up to June 2023 continue to point to sluggish economic activity, essentially in keeping with the provisional projections of 0.3% real GDP growth in FY23, which represents a dramatic decrease from the around 6% increase in the preceding two years.

Barring unforeseen circumstances, the MPC anticipates that economic activity will moderately improve in FY24, helped by a rise in output of rice and cotton.

The Committee also noted that the prognosis for manufacturing, construction, and related services has improved as a result of increased business confidence and the removal of priority import advice.

Despite this recovery, GDP would still be range-bound due to the ongoing effects of compounded monetary tightening and anticipated fiscal austerity.

With these factors taken into account, a real GDP increase of 2 to 3% is predicted for FY24.

Outside Sector

The cumulative current account deficit in FY23 significantly decreased to 0.7% of GDP from 4.7% in FY22 as a result of the current account balance registering a surplus for the fourth consecutive month in June.

The MPC stated that this improvement is mostly attributable to policy-induced import compression, which more than compensated the year-over-year fall in exports and worker remittances. The current account deficit is anticipated to stay within the range of 0.5 to 1.5% of GDP in FY24 going ahead.

This evaluation considers the effects of shifting national and international economic situations. The MPC anticipates that the outlook for commodity prices globally and the modest domestic economic recovery will keep imports in a narrow range.

After the IMF SBA, the chances for bilateral and multilateral inflows have significantly improved on the funding side.

This is significant in terms of creating external reserves and supplying short-term external funding requirements. Additionally, the market-determined currency rate will continue to facilitate reserve accumulation and act as a first line of defence against external shocks.

Monetary Sector

According to the most recent data, the fiscal and primary deficits for FY23 may be higher than originally anticipated.

The Committee raised the possibility that the central bank's attempts to keep inflation and inflation expectations under control would be compromised by this fiscal consolidation that wasn't as early as expected.

In light of this, the MPC stressed how crucial it is to achieve the anticipated fiscal consolidation in FY24 in order to achieve greater macroeconomic stability.

Credit and Cash

From 13.6% in FY22 to 14.4% in FY23, broad money (M2) growth grew. Increased public sector borrowing, particularly budgetary borrowing from commercial banks with declining foreign inflows, was the key driver of this greater M2 growth.

Contrarily, as economic activity slowed and monetary policy tightened, the growth of private sector lending significantly slowed.

Future improvements in the funding mix following the release of multilateral and bilateral external financing, along with an increase in economic activity, would allow for a modest rise in private sector credit this year.

This evaluation takes into account the prospect for near-term inflation as well as the lag effect of monetary tightening on credit demand.

Outlook for Inflation

The national CPI inflation rate has significantly decreased from its peak of 385 YoY in May 2023 to 29.4% in June, as was expected.

There was a widespread drop. In the near future, the MPC anticipates that the YoY inflation will usually continue to decline due to weak domestic demand in the context of restrictive monetary policy, a positive outlook for global commodity prices, and a positive base effect.

This evaluation considers the impact of recent actions (increases in power rates, adjustments to levies and taxes on consumer goods and raw materials), as well as their ripple effects.

Based on this evaluation, the MPC anticipates average inflation to be between 20 and 22% in FY24, which is lower than the FY23 average of 29.2%.

According to the MPC's forecast, inflation will progressively decline throughout the first half of FY24 before dropping below 20% in the second.

This view is, however, vulnerable to hazards brought on by both internal and international shocks, such as unfavourable climatic occurrences and volatile commodity prices.

In this regard, the MPC will keep a close eye on how current domestic and international events are affecting the inflation forecast and, as necessary, adjust the stance of monetary policy to ensure price stability.