SBP holds rate at 22pc, eyes inflation outlook after gas shock

KARACHI: The State Bank of Pakistan (SBP) has kept its benchmark interest rate unchanged at a record high of 22 percent on Tuesday, as it awaited signs of easing inflation pressures after a recent hike in gas prices.

The SBP's Monetary Policy Committee (MPC) decided to maintain the policy rate for the fourth consecutive meeting, following 11 rate increases since September 2021. The MPC took into account the impact of the gas price increase in November, which pushed up inflation more than expected, but also noted some offsetting factors, such as lower oil prices and improved agricultural supply.

“The decision does take into account the impact of the recent hike in gas prices on inflation in November, which was relatively higher than the MPC’s earlier expectation,” the central bank said in the statement.

“The Committee viewed that this may have implications for the inflation outlook, albeit in the presence of some offsetting developments, particularly the recent decrease in international oil prices and improved availability of agriculture produce.”

Analysts expect another gas price hike in January, which could add to inflationary pressures in the short term. The SBP did not release any inflation projections this time, but in July it forecast average inflation for the fiscal year ending in June 2024 to be between 20 percent and 22 percent.

“The Committee assessed that the real interest rate continues to be positive on a 12-month forward-looking basis and inflation is expected to remain on a downward path,” the statement said.

In an effort to obtain a $3 billion bailout from the International Monetary Fund (IMF) as part of a reform programme meant to stabilize the faltering economy, the rate was raised to 22 percent in an off-cycle meeting in June.

In response to high inflation, the SBP has increased interest rates by a total of 15 percentage points during the last two years. Pakistan has been facing severe inflationary pressures. The consumer price index-based inflation reached a record high of 38 percent in May 2023.

November saw a rise in CPI inflation to 29.2 percent year-on-year due to an increase in energy prices to satisfy the reform targets required by the IMF's lending programme. The SBP reports that during the month, core inflation stayed steady at 21.5 percent, only marginally less than its peak of 22.7 percent in May.

“Barring a significant increase in regulated prices, the MPC continues to expect that headline inflation will decline significantly in the second half of FY24 due to contained aggregate demand, easing supply constraints, moderation in international commodity prices and favorable base effect.”

“The quarterly GDP growth outcome for Q1-FY24 remained in line with the MPC's expectation of a moderate economic recovery," it said. The SBP announced no change in the interest rates ahead of the International Monetary Fund’s executive board approval for the next loan tranche of around $700 million.

Funds totaling $1.2 billion have been released by the IMF. “The successful completion of the staff level agreement of the first review under the IMF SBA program would unlock financial inflows and improve the SBP's FX reserves,” the SBP said.

After the monetary policy meeting, SBP Governor Jameel Ahmad informed analysts that the external debt repayments will continue as planned. The SBP governor expects that the IMF tranche and other inflows will be realized after the IMF board meeting on January 11, providing support to foreign exchange reserves.

The IMF will release a tranche of $700 million next month which is in line withSBP's expectations, said Topline Securities, citing SBP’s governor analysts briefing. The SBP’s governor stated that they will ensure that the net domestic assets and net foreign assets (NFA) targets for December are met.

The IMF expects Pakistan's foreign exchange reserves to reach $9 billion by June 2024. However, the IMF's detailed country report will be released after the board meeting, where revised numbers may be provided.

The SBP released a profit of Rs972 billion to the government for FY23 compared with Rs371 billion in the previous year, the governor said and added that the FY24 profit will be higher than FY23 which will support fiscal operations.

The governor stated that the total external financing requirement for FY24 is $24.6 billion out of which $5.4 billion has already been paid. According to Ahmad, the SBP estimates rollovers worth $12.4 billion of which $9 billion have already been committed. The net principal payable in FY24 stands at $4.3 billion.

The governor highlighted that the decision to reduce the policy rate will be data-driven, such as inflation, the rupee movement, etc. However, analysts said that the monetary tightening has ended and a rate cut is in the offing early next year (Mar 2024). "We do expect the easing cycle to continue in the remainder of 2024, with rates bottoming at 16 percent by December 2024," said an analyst at Alfalah Securities.