Monetary Policy September-2023: SBP Maintained Policy Rate

September 14, 2023

Interest Rates Hike paused for the first time in the year

In its meeting today, the Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) has announced its decision to maintain the policy rate at 22%. This decision has diverged from market expectations, as most market participants had anticipated a rate increase of 100-200 basis points.

The MPC’s choice is grounded in several factors, including the latest inflation data, which indicates a sustained decrease in inflation from its peak of 38% in May to 27.4% in August 2023. Despite recent global increases in oil prices, which are being passed on to consumers through adjustments in energy prices, inflation is forecasted to follow a downward trajectory, especially in the latter half of this year.

Real interest rates are expected to remain positive in the foreseeable future. Additionally, the expected improvement in supply constraints due to enhanced agricultural output and recent regulatory measures to curb speculative activity in the FX and commodity markets are anticipated to support the inflation outlook.

The MPC acknowledged four key developments since its July meeting. First, there has been a positive shift in the agricultural outlook, supported by recent data on cotton arrivals, improved input conditions, and healthy vegetation of other crops as indicated by satellite data.

Second, global oil prices have surged and are now hovering above $90 per barrel. Third, as anticipated, the current account, after remaining in surplus for the previous four months, posted a deficit in July, partly due to the easing of import restrictions.

Lastly, administrative and regulatory measures aimed at enhancing the availability of essential food commodities and curbing illicit activities in the foreign exchange market have begun to yield results, narrowing the gap between interbank and open market exchange rates.

The MPC reiterated its commitment to monitor risks to the inflation outlook and to take necessary action if warranted, to maintain price stability. Simultaneously, the MPC emphasized the importance of maintaining a prudent fiscal stance to control aggregate demand, a crucial step in achieving sustainable inflation reduction and the medium-term target of 5-7% by the end of FY25.