KARACHI - State Bank of Pakistan (SBP) on Monday decided to keep its policy rate unchanged at 9.75 percent in line with the forward guidance provided in the last monetary policy statement, announces SBP Governor Dr. Reza Baqir.

Addressing a press conference to unveil SBP monetary policy statement on Monday here at SBP’s Main Building, SBP Governor said, while deciding to maintain the policy rate at same level in its today’s meeting, the Monetary Policy Committee of the Central Bank considered the measures taken to lower inflation and keep the ongoing economic recovery sustainable. These measures included a cumulative 275 basis point increase in the policy rate, higher bank cash reserve requirements, regulatory tightening of consumer finance, and curtailment of non-essential imports. SBP’s Deputy Governors Ghulam Murtaza Syed and Ms Seema Kamil were also present.

The Governor, elaborating on the current monetary policy statement, said that since the last meeting that held on December 14, 2021 several developments suggested that these demand-moderating measures were gaining traction and had improved the outlook for inflation. 

The recent economic growth indicators were appropriately moderating to a more sustainable pace. While year-on-year headline inflation was high and would likely remain so in the near term due to base effects and energy prices, the momentum in inflation had slowed with month-on-month inflation flat in December compared to a significant rise of 3 percent in November. 

Inflation expectations of businesses have also declined considerably. The current account deficit appeared to have stopped growing since November and the non-oil current account balance was expected to achieve a small surplus for the fiscal year 2021-22. Finally, and importantly, the enactment of the recent Finance (Supplementary) Act- 2022 represents significant additional fiscal consolidation as compared to the budget and had lowered the outlook for inflation in fiscal year 2022-23.

Looking ahead, and against the backdrop of these developments that had improved the inflation outlook, the MPC was of the view that current real interest rates on a forward-looking basis were appropriate to guide inflation to the medium-term range of 5-7 percent, support growth, and maintain external stability. If future data outturns required a fine-tuning of monetary policy settings, the MPC expected that any change would be relatively modest.

 In reaching its decision, the MPC considered key trends and prospects in the real, external and fiscal sectors, and the resulting outlook for monetary conditions and inflation. 

Real Sector: The economic recovery underway over the last 18 months continues, with its pace moderating from a rebased estimate of 5.6 percent in fiscal year 2020-21. Since the last meeting, year-on-year growth rates of several high-frequency demand indicators either stabilized or slowed, including cement dispatches and sales of petroleum products, tractors and commercial vehicles. On the supply side, large scale manufacture ring production decelerated to 3.3 percent year-on-year in July-November 2021, partly reflecting a high base-effect as well as higher input costs, while electricity generation stabilized. Similarly, there has been some easing in the momentum of imports and tax revenue growth. Prospects remain favourable in agriculture, with an improved Rabi crop outlook offsetting reports of lower cotton output. 

   Overall, growth in financial year 2021-22 was expected around the middle of the forecast range of 4-5 percent, slightly lower than previous expectations in light of moderating demand indicators and higher base effects from the upward revision in last year’s growth rate. Risks to the outlook include, on the domestic front, the current growing Omicron wave and, on the external front, the possibility of faster than anticipated tightening by the US Federal Reserve and geopolitical events in Europe that might have implications for global financial conditions. 

External Sector : Through the first half of fiscal year 2021-22, the current account deficit had reached  dollars 9 billion. Based on PBS data, imports rose to $40.6 billion, up around 66 percent year-on-year, with energy imports and Covid vaccines accounting for more than half the rise. Encouragingly, imports excluding energy and vaccines had stabilized in the last two months. Exports grew by nearly 25 percent year-by-year to reach $15.1 billion, buoyed by record-high shipments of textiles as well as strong rice exports. 

Meanwhile, remittances rose by 11.3 percent year-on-year to an all-time high of $15.8 billion during the first half of the fiscal year. Looking ahead, the current account deficit was expected to decline through the remainder of financial year 2021-22, as import growth slowed in response to a normalization of global commodity prices and the fuller impact of demand-moderating measures. 

Indeed, the non-oil current account deficit was less than one-fourth the record levels reached during the first half of fiscal year 2017-18. The current account projection was subject to risks on both sides. On the one hand, the deficit could be larger if global commodity prices take longer to normalize. On the other, it could be smaller if the fiscal consolidation associated with the Finance (Supplementary) Act had a faster and more pronounced impact on demand.

Fiscal Sector: During the first half of the fiscal year 2021-22, FBR tax collections grew strongly by 32.5 percent year-by-year. As a result, the fiscal deficit shrank to 1.1 percent of GDP during July-October FY22, compared to 1.7 percent of GDP during the same period last year. 

The primary surplus also improved by 0.1 percentage points to 0.4 percent of GDP. Looking ahead, with the passage of the Finance (Supplementary) Act that withdrew certain tax exemptions, the fiscal deficit was projected to be around 0.5 percent of GDP lower than previously expected for financial year 2021-22. Together with recent policy rate increases and accounting for the usual lagged impact of fiscal measures, this additional fiscal consolidation should help further moderate the pace of domestic demand growth, and thus improve the outlook for inflation and the current account in fiscal year 2022-23.

Monetary and Inflation Outlook : During the first half of the financial year 2021-22, private sector credit cumulatively grew by 13.4 percent, largely driven by increased demand for working capital loans especially by rice, textile, petroleum and steel industries. Since the last meeting, both short and long-term secondary market yields, benchmark rates and cut-off rates in the government’s auctions declined significantly, in line with the forward guidance provided by the MPC and the conduct of 2-month open market operations by the SBP. 

While headline and core inflation rose in December, both the sequential momentum of inflation and inflation expectations of businesses fell significantly. Together with low base effects, one-off cost-push pressures from energy tariff increases and the removal of tax exemptions in the Finance (Supplementary) Act are likely to keep year-on-year inflation elevated over the next few months, close to the upper end of the average inflation forecast of 9-11 percent in fiscal year 2021-22. However, during fiscal year 2022-23, inflation was expected to decline toward the medium-term target range of 5-7 percent more quickly than previously forecasted as demand-side pressures wane faster due to the Finance (Supplementary) Act and recent moderation in economic activity indicators. 

The MPC would continue to carefully monitor developments affecting medium-term prospects for inflation, financial stability, and growth.