KARACHI: The State Bank of Pakistan held its key interest rate steady for the seventh consecutive meeting on Monday due to inflation concerns amid geopolitical risks and impeding fiscal measures.
The SBP kept the policy rate at a record 22 percent, as was largely anticipated but at the same time defied some expectations in the financial markets for monetary easing. The SBP has signalled to the markets that it will maintain a cautious policy stance until it sees the upcoming budget implications on inflation and clarity regarding the International Monetary Fund's discussions on a new loan programme, despite the negative effects of the prolonged monetary tightening on the economy and businesses.
With the help of better food supply, decreased global commodity prices, and a strong base effect, Pakistan's consumer price index (CPI) inflation dropped to 20.7 percent in March, the lowest level in almost two years. In February, the CPI was 23.1 percent. The SBP notes that inflation is still high, though.
“The Committee also noted that this inflation outlook is susceptible to risks emanating from the recent global oil price volatility along with bottoming out of other commodity prices; the potential inflationary impact of the resolution of circular debt in the energy sector; and tax rate-driven fiscal consolidation going forward,” the SBP said in the monetary policy statement.
“Cognizant of these risks, the Committee assessed that it is prudent to continue with the current monetary policy stance at this stage, with significant positive real interest rates,” it added.
“On balance, the Committee stressed on continuation of the current monetary policy stance to bring inflation down to the target range of 5 – 7 percent by September 2025.” Hours before the IMF executive board meets to discuss approving $1.1 billion in funding for Pakistan, the SBP made its decision. The $3 billion stand-by arrangement expires this month. The country hopes to clinch a longer and larger loan programme with the IMF. A mission from the IMF is expected to arrive in Islamabad next month to initiate talks for a new bailout.
“In spite of the positive real interest rate, Pakistan Central Bank rightly kept rates unchanged,” said Muhammad Sohail, the CEO of Topline Securities.“This is mainly due to the risk of inflation remaining high in coming months due to higher global commodity prices and budgetary measures that may increase local prices,” Sohail added.
“Though the market was divided on whether SBP will cut rate or not this time, but looking at stable FX reserves, low forecasted inflation and timely IMF new loan we think rates will come down soon,” he noted.
The SBP has maintained a tight monetary policy for 31 consecutive months, from September 2021 to date which is the second-longest period without a rate cut in recent history.In FY24, the total external debt to be serviced amounted to $24.3 billion, with $3.9 billion allocated for interest payments and the remaining $20.4 billion for principal repayments, the SBP’s governor Jameel Ahmad told analysts after the monetary policy meeting.
Most of this total amount has been settled, with only $1.8 billion in principal remaining to be paid in the remaining months of FY24, the governor said.In response to a question regarding the SBP reserves by June, he restated their target at $9.1 billion, in line with the $3 billion loan agreement with the IMF. Further, the SBP expects its reserves to reach $9 billion after the IMF board approves a $1.1 billion tranche. In addition, the SBP wants to maintain or increase its reserves to reach or beyond the June target.
The governor stressed that since the conclusion of FY23, the SBP has strengthened reserves without appreciably raising debt. During this time, Pakistan achieved an improved maturity profile by repaying short-term commercial loans, according to him.
The total dividend and profits repatriated amounted to $800 million in the nine months of the fiscal year 24, compared with $235 million paid in the same period last year.The profit of SBP is expected to increase to over Rs2.0 trillion this year from Rs972 billion last year. It will be transferred to the government by the first quarter of FY25 according to Ahmad.