Pakistan’s Central Bank Maintains Record High Policy Rate

Pakistan’s central bank has opted to maintain its benchmark policy rate at 22% for the third consecutive time in four months, in line with market expectations. The State Bank of Pakistan (SBP) has justified this decision by asserting that this rate effectively balances inflation and economic activities.

In their most recent monetary policy statement issued on Monday, the SBP recognized the projected increase in headline inflation for September 2023. However, they anticipate a decline in October, followed by a sustained decrease, particularly in the second half of the fiscal year. Despite acknowledging the risks associated with recent global oil price fluctuations and impending gas tariff hikes in November 2023, the monetary policy committee (MPC) has pointed out specific factors that mitigate these risks.

These factors include targeted fiscal consolidation in Q1, improvements in the market’s availability of essential commodities, and the alignment of interbank and open market exchange rates. The MPC has also emphasized several significant developments since their September meeting, including encouraging estimates for kharif crops and their positive repercussions on the broader economy.

During August and September, the current account deficit witnessed a significant narrowing, which played a pivotal role in stabilizing the SBP’s foreign reserves amidst limited external financing during these two months. Fiscal consolidation has remained on its intended path, with enhancements observed in both fiscal and primary balances during Q1-FY24. While core inflation remains stable, recent pulse surveys have shown improvements in inflation expectations for both consumers and businesses.

Nevertheless, in light of these developments, the MPC has underscored the importance of maintaining a tight monetary policy stance. They have reaffirmed their earlier position that the real policy rate remains significantly positive on a 12-month forward-looking basis and is appropriate for achieving the medium-term inflation target of 5-7% by the end of FY25. The MPC has also acknowledged that the realization of this outlook hinges on sustained fiscal consolidation and the timely receipt of planned external inflows.

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