SBP maintains policy rate status quo for sixth straight meeting

Islamabad: The Monetary Policy Committee (MPC) has decided to keep the policy rate unchanged at 22%, the State Bank of Pakistan (SBP) said on Monday, adding that the continuity required to bring inflation down to targeted range of 5-7% by September 2025.
The MPC, at its meeting today, noted that inflation, in line with earlier expectations, has begun to decline noticeably from H2-FY24. It also observed that despite the sharp deceleration in February, the level of inflation remains high and its outlook is susceptible to risks amidst elevated inflation expectations.
Citing indicators, the central bank’s committee decided to continue the current monetary stance required bring inflation down to the target range of 5-7% by September 2025.
As per the SBP statement, the MPC reiterated that this assessment is also contingent upon continued targeted fiscal consolidation and timely realisation of planned external inflows.
The committee also discussed a few key developments since its last meeting, which have implications for the macroeconomic outlook.
First, the latest data continues to depict moderate pick-up in economic activity, led by rebound in agriculture output.
Second, the external current account balance is turning out better than anticipated and has helped maintain FX buffers despite weak financial inflows.
Third, while inflation expectations of businesses have shown a steady increase since December, those for consumers have also inched up in March.
Lastly, on the global front, while the broader trend in commodity prices remained benign, oil prices have increased; partly reflecting the continued tense situation in the Red Sea.
Moreover, amidst uncertainty regarding the inflation outlook, key central banks in both advanced and emerging economies have continued to maintain a cautious monetary policy stance in recent meetings.

Real sector
Incoming data supports the MPC’s earlier expectation of moderate recovery in economic activity in FY24 with real GDP growth to remain in the range of 2–3%.
The agriculture sector remains the key driver.
After a strong performance of Kharif crops (especially cotton and rice), prospects for wheat crop also look promising due to increase in area under cultivation, better input conditions, and higher output prices.
Denser vegetation of wheat crop, as captured by satellite images, also support this assessment. In the industrial sector, large-scale manufacturing, despite a slight decline of 0.5% during July-January is expected to recover in the coming months due to improved capacity utilisation and employment conditions and favorable base effect.
Furthermore, knock-on impact of commodity producing sectors and other leading indicators point towards gradual recovery in the services sector.

External sector
The current account recorded a deficit of $269 million in January 2024 which resulted in a cumulative deficit of $1.1 billion during July-January FY24, which is down by around 71% year-on-year.
The MPC noted that the improvement largely owes to narrowing of the trade deficit, driven by both an increase in exports and a decline in imports.
The exports have risen on the back of higher food exports, whereas import payments have remained subdued due to better domestic agriculture output, moderate domestic demand and supportive global commodity prices.
Moreover, workers’ remittances have been rising consistently on year-on-year basis since October 2023, supported by incentives and regulatory reforms to channelise inflows via formal channels.
Financial inflows showed a modest decline in January amidst continuing public debt repayments in the absence of significant official and private sector inflows.
The MPC assessed that the current account deficit is likely to remain closer to the lower bound of 0.5 to 1.5 per cent of GDP forecast range for FY24, which will support the FX reserves position.