“Decision aims to ensure elevated inflation does not become entrenched,” SBP says.
SBP increased rate cumulatively by 900 basis points since Sept 2021 to Nov 2022.
MPC says it will continue to carefully monitor developments affecting prospects for inflation, growth.
KARACHI: The Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) Friday raised the key policy rate by 100 basis points to 16% — the highest since 1999.
The central bank, in a statement, issued after the meeting said that the decision reflects the MPC’s view that inflationary pressures have proven to be stronger and more persistent than expected.
1/3 At today’s meeting, the Monetary Policy Committee (MPC) decided to raise the policy rate by 100 basis points to 16%. https://t.co/E4scWh3Eeo
“This decision is aimed at ensuring that elevated inflation does not become entrenched and that risks to financial stability are contained, thus paving the way for higher growth on a more sustainable basis,” the MPC said.
The SBP noted that amid the ongoing economic slowdown, inflation is increasingly being driven by persistent global and domestic supply shocks that are raising costs.
“In turn, these shocks are spilling over into broader prices and wages, which could de-anchor inflation expectations and undermine medium-term growth,” the statement read, adding that consequently the rise in cost-push inflation cannot be overlooked and necessitates a monetary policy response.
The MPC further noted that the short-term costs of bringing inflation down are lower than the long-term costs of allowing it to become entrenched. Meanwhile, curbing food inflation through administrative measures to resolve supply-chain bottlenecks and any necessary imports remains a high priority.
The central bank increased the rate by a cumulative 900 basis points in 15 months (September 2021 to November 2022) to 16%.
The MPC, Since the last meeting, noted three key domestic developments, including:
Headline inflation increased sharply in October, food prices also accelerated significantly, and core inflation has risen further
A sharp decline in imports led to a significant moderation in the current account deficit in both September and October
After incorporating Post-Disaster Needs Assessment of floods, the FY23 projections for growth of around 2% and current account deficit of around 3% of GDP are re-affirmed.
However, the committee mentioned that higher food prices and core inflation are now expected to push average FY23 inflation up to 21-23%.
3/3 After incorporating the Post-Disaster Needs Assessment of the floods and latest developments, the FY23 projections for growth of around 2% and a current account deficit of around 3% of GDP shared in the last monetary policy statement are re-affirmed.
Current account deficit to remain around 3% of GDP shared
Average FY23 inflation to be calculated around to 21-23%
Forex reserves expected to improve gradually
Inflation expected to fall toward upper range of the 5-7%
External sector
The MPC mentioned that on the financing side, inflows are being negatively affected by domestic uncertainty and tightening global financial conditions as major central banks continue to raise policy rates.
The financial account recorded a net inflow of $1.9 billion during the first four months of FY23, compared to $5.7 billion during the same period last year.
“Looking ahead, higher imports of cotton and lower exports of rice and textiles in the aftermath of the floods should be broadly offset by a continued moderation in overall imports due to the economic slowdown and softer global commodity prices,” it said.
The committee predicted the current account deficit is expected to remain moderate in FY23, with foreign exchange reserves gradually improving as anticipated external inflows from bilateral and multilateral sources materialise.
The central bank said that if the recent decline in global oil prices intensifies or the pace of rate hikes by major central banks slows, pressures on the external account could diminish further.
Monetary and inflation outlook
As part of its forward guidance, the MPC said that it will continue to carefully monitor developments affecting medium-term prospects for inflation, financial stability, and growth.
The central bank noted that headline inflation rose by almost 3½ percentage points in October to 26.6% year-on-year, driven by normalization of fuel cost adjustments in electricity tariffs and rising prices of food items.
Energy and food prices rose by 35.2 and 35.7% year-on-year, respectively. Meanwhile, core inflation increased further to 18.2 and 14.9% year-on-year in rural and urban areas respectively, as rising food and energy inflation seeped into broader prices, wages and inflation expectations.
“As a result of these developments, inflation projections for FY23 have been revised upwards. While inflation is likely to be more persistent than previously anticipated, it is still expected to fall toward the upper range of the 5-7% medium-term target by the end of FY24, supported by prudent macroeconomic policies, orderly Rupee movement, normalising global commodity prices and beneficial base effects,” the statement read.
Moreover, it was noted that in line with the slowdown in economic activity, private sector credit continued to moderate, increasing only by Rs86.2 billion during the first quarter of the fiscal year 2022-23 compared to Rs226.4 billion during the same period last year.
The central bank attributed this deceleration to a significant decline in working capital loans to wholesale and retail trade services as well as to the textile sector in the wake of lower domestic cotton output, and a slowdown in consumer finance.
In an effort to strengthen the port’s economic importance, the Federal Government has made the decision to direct fifty percent of all imports from the public sector to Gwadar Port.
By taking this action, which has the backing of the Special Investment Facilitation Council, the port’s financial situation is going to be improved.
The Cabinet will be presented with a summary of imports through Gwadar by the Ministry of Maritime Affairs, which will take place after Prime Minister Shehbaz Sharif’s recent trip to China.
When the next Cabinet Meeting takes place, Ahsan Iqbal, the Federal Minister for Planning, Development, and Special Initiatives, will examine the Chinese offer for the Karachi to Hyderabad Section of the ML-1 Project and bring it to the Cabinet.
Company preparations for the Shanghai International Import Expo, which will take place in November 2024, are being made by the Board of Investment and the Ministry of Commerce of Pakistan.
One of the most important aspects of the China-Pakistan Economic Corridor is the Gwadar port, which serves as a significant commerce route connecting China, the Middle East, Africa, and Europe. At this time, the Gwadar Port is able to accommodate two huge ships, and by the year 2045, it is anticipated that it would be able to handle up to 150 ships.
By developing the Gwadar Port, regional connectivity would be improved, employment will be created, and international investment will be attracted.
Gold prices in Pakistan surged significantly on Thursday following two consecutive days of decline, with the price per tola rising by Rs2,000 to reach Rs262,100. This increase was in accordance with the downward trend in international market values.
The All-Pakistan Gems and Jewellers Sarafa Association (APGJSA) reported that the price of 10 grams of 24-karat gold rose by Rs1,714, reaching Rs224,708.
Conversely, the world gold market experienced an upward trajectory. According to the APGJSA, the global price of gold surged to $2,503 per ounce following a $22 gain during the trading session.
The local market experienced a significant decline in silver prices, decreasing from Rs50 to Rs2,900 per tola after a prolonged period.
The local market’s gold prices remain subject to the ever-changing dynamics of the international market, as well as domestic considerations such as currency exchange rates and domestic demand.
On Tuesday night, there were virtual talks between representatives of the Finance Ministry and the IMF delegation, with the main topics being external finance and income generation.
According to people familiar with the situation, no date has been set for the IMF’s Executive Board to approve the loan despite the ongoing negotiations.
Officials from the Finance Ministry informed the IMF mission about the government’s initiatives to get outside funding during the discussions. Updates on loan rollovers and fresh finance commitments from allies were included in this. According to sources, the IMF has received a schedule, and loan rollovers are expected to be finished by the end of next week.
The $12 billion in debt must be rolled over before the loan can be approved by the Executive Board, according to the IMF mission.
In the virtual discussions, representatives of the Federal Board of Revenue (FBR) conversed with the IMF team over the revenue deficit. The FBR must reach its revenue goals for this month, according to the IMF mission. As a result, the IMF has asked the FBR to submit a thorough strategy outlining how it will close the gap left by the shortfall and guarantee that revenue goals are reached.
Apart from the conversations on outside funding, there are rumors that the Finance Ministry is actively holding talks with commercial banks in order to obtain new funding. According to reports, negotiations are taking place with four distinct sources for commercial loans, which are anticipated to support the government’s overall financial plan.
Finance Minister Muhammad Aurangzeb disclosed on Tuesday that the IMF was in favor of introducing targeted subsidies. He said that qualifying recipients might receive these subsidies through the Benazir Income Support Programme (BISP).
In order to guarantee consistency, the minister announced that this week’s talks with chief ministers will focus on implementing a similar policy across the country. He was having a casual conversation in parliament with the journalists.
In response to queries about outside funding, Aurangzeb revealed a $2 billion deficit and said that talks to close this gap are progressing. He stressed how crucial it is to obtain business loans.
He went on, “At this point, there’s a need to secure an agreement for commercial loans, not exactly their issuance,” emphasizing that debt rollover negotiations are nearing their conclusion and doing well. The minister expected that these developments would shortly be reported to the governments of allied countries by relevant authorities.