Karachi, October 10, 2022 (PPI-OT): Monetary Policy Statement – SBP decided to maintain the policy rate at 15%
In the latest Monetary Policy Announcement, the State Bank of Pakistan (SBP) kept the policy rate unchanged at 15%.; in-line with our expectation. Interest corridor stays at ceiling (Reverse Repo) 16% and floor (repo) rate of 14%.
Key Points and Outlook:
Inflation: since the last monetary policy meeting, inflation had peaked at 27.3%y in Aug-22, and then dropped down to 23.2%y in Sep-22, as the govt. took administrative measures and electricity charges came 65%m lower; however, both core and food inflation ticked up in the aftermath of floods. Going ahead, it is expected that the supply shock from the flood likely to put pressure on headline inflation in the upcoming months and could raise average headline inflation in FY23 above the pre-flood projection of 18-20%.
Growth: most demand and supply indicators reported lower figures since the last MPC meeting. MPC expects growth to drop to 2% compared to earlier projection of 3-4%. The existing policy rate strikes an appropriate balance between managing inflation and economic growth.
Fiscal: During the 1qFY23, FBR tax collection rose to PKR 1.625 trillion, surpassing the target by PKR 27 billion. While the floods could make it challenging to achieve the planned fiscal consolidation this year, the government has so far been able to meet urgent spending needs through re-allocation and re-appropriations of budgeted funds. Going forward, additional foreign inflows, including in the form of grants, should help fund any fiscal slippages.
Current Account Balance: C/a balance for the month of Aug-22 came at deficit of US$0.7bn, which is half the level in July-22. Recently, PBS shared trade data for the month of Sep-22 where trade deficit has further narrowed down to US$2.9bn compared to US$ 3.6bn in previous month. Looking ahead, the floods are likely to result in greater need for some agricultural imports such as cotton and a few perishable food items. At the same time, exports of rice and textiles are likely to be negatively affected. However, these adverse impacts could to a large extent be offset by downward pressures on the import bill from lower domestic growth and falling global commodity prices and shipping costs.
US$/PKR parity: A continuation of prudent monetary policy and orderly movements in the Rupee should help contain core inflation going forward.
The MPC will continue to carefully monitor developments affecting medium-term prospects for inflation, financial stability, and growth.