SBP keeps interest rate unchanged at 22pc

In accordance with market expectations, State Bank of Pakistan has opted to keep its key policy rate steady at a historic high of 22% on Tuesday, anticipating the potential approval by the International Monetary Fund (IMF) board for disbursing the next $700 million loan tranche to the country in January 2024.

This marks the fourth consecutive monetary policy review where the bank has maintained the rate over the past six months, adhering to a stringent monetary policy since July, partially in anticipation of a slowdown in inflation readings.

In its most recent monetary policy statement, the State Bank of Pakistan (SBP) decided to retain the policy rate at 22%. The decision factors in the impact of the recent increase in gas prices in November, which exceeded the monetary policy committee's (MPC) earlier expectations.

Despite this, the committee acknowledged potential implications for the inflation outlook, offset by recent decreases in international oil prices and improved availability of agricultural produce.

Additionally, the committee assessed that the real interest rate remains positive on a 12-month forward-looking basis, and inflation is expected to trend downward. The MPC anticipates a significant decline in headline inflation in the second half (Jan-Jun) of FY24 due to contained aggregate demand, easing supply constraints, moderation in international commodity prices, and a favorable base effect.

Highlighting key developments since its October meeting, the MPC pointed out the successful completion of the staff-level agreement of the first review under the IMF SBA program, which would unlock financial inflows and enhance the SBP's foreign exchange reserves. The committee also noted the quarterly GDP growth outcome for Q1-FY24 aligning with expectations of a moderate economic recovery, improvement in consumer and business confidence surveys, and the persistence of elevated core inflation gradually decreasing.

Considering these factors, the committee affirmed that the current monetary policy stance is suitable to achieve the inflation target of 5-7% by the end of FY25. The assessment is contingent on sustained targeted fiscal consolidation and the timely realization of planned external inflows.