SBP hints at tightening policy rate in next meeting scheduled to be held on October 10.
Central bank had cumulatively increased rate by 800bps from Sept 2021 to Jul 2022.
In today’s meeting, MPC said it was “prudent to take a pause at this stage”.
KARACHI: In line with the market expectations, the State Bank of Pakistan (SBP) Monday maintained the status quo in the interest rate at 15% — the highest since November 2008.
The monetary policy committee (MPC) met under the chair of Deputy Governor Syed Murtaza and reviewed the economic indicators. Despite record high inflation the central bank decided to keep the interest rate unchanged for the next six weeks.
The central bank had cumulatively increased the rate by 800 basis points from September 2021 to July 2022 to control inflation and narrow the current account deficit. However, the central bank kept the interest rate unchanged in today’s meeting for the next six weeks.
The central bank today felt that it was “prudent to take a pause at this stage” as it noted that recent inflation developments are in line with expectations, domestic demand is beginning to moderate and the external position is also showing some improvement due to a lower trade deficit and resumption of the International Monetary Fund (IMF) programme.
“This pause allows MPC to assess the impact of 800 bps tightening since September and fiscal consolidation planned for FY23,” the monetary policy statement mentioned, adding that it is also in line with recent actions by other emerging markets central banks, who have been holding rates in recent meetings as global growth and commodity prices have slowed.
The committee also noted that in order to contain external pressures and support the rupee going forward, “it is important to contain the current account deficit by delivering the budgeted fiscal consolidation, lowering energy imports through energy conservation measures, and keeping the IMF programme on track.”
Since the last meeting on July 7, MPC noted three key domestic developments, which include:
Headline inflation rose further to 24.9% in July, with core inflation also ticking up.
Trade balance fell sharply in July and the rupee has reversed course during August, appreciating by around 10% on improved fundamentals and sentiment.
IMF’s board meeting will take place on August 29 and is expected to release a further tranche of $1.2 billion, as well as catalysing financing from multilateral and bilateral lenders.
Moreover, the committee also noted that Pakistan has also successfully secured an additional $4 billion from friendly countries over and above its external financing needs in the fiscal year 2022-23. As a result, foreign exchange reserves will be further augmented through the course of the year, helping to reduce external vulnerability.
‘Outlook subject to uncertainty’
In its forward guidance, the central bank hinted at tightening the policy rate in the next meeting scheduled to be held on October 10.
“MPC intends to remain data-dependent, paying close attention to month-on-month inflation, inflation expectations, developments on the fiscal and external fronts, as well as global commodity prices and interest rate decisions by major central banks,” it said.
The central bank projected that in the coming months, curbing food inflation through supply-side measures that boost output and resolve supply-chain bottlenecks should be a high priority.
‘Inflation to peak in first quarter’
“Looking ahead, headline inflation is projected to peak in the first quarter before declining gradually through the rest of the fiscal year. Thereafter, it is expected to decline sharply and fall to the 5-7% target range by the end of fiscal year 2023-24, supported by the lagged effects of tight monetary and fiscal policies, the normalisation of global commodity prices, and beneficial base effects,” it said.
The central bank said that this baseline outlook “remains subject to uncertainty”, with risks arising from the path of global commodity prices, the domestic fiscal policy stance, and the exchange rate.
“The MPC will continue to carefully monitor developments affecting medium-term prospects for inflation, financial stability, and growth,” it maintained.
‘Good decision’
Terming the decision taken by the central bank as “good”, Alpha Beta Core CEO Khurram Schehzad lauded the central bank for not raising the interest rate anymore.
“Decline in global commodities should give respite to import bill, however, monetary policy tightening and its transition would continue to be under-effective given massive fiscal deficit and governance issues.,” he said, adding that fiscal prudence is key to country’s economic issue.
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.