Inflation receding but still high: SBP

KARACHI: The State Bank of Pakistan (SBP) on Monday left its benchmark interest rate unchanged for the sixth straight time, warning of risks to the inflation outlook amid uncertainty regarding administrated energy prices, and anticipated additional taxes Continued from page 1 for fiscal consolidation.

The SBP maintained its tight monetary policy and kept the policy rate at a record high 22 percent, as expected. However, given the possibility of a positive real interest rate scenario, some analysts and market players were anticipating the first rate cut in nearly four years. As per several surveys and polls, the majority of analysts expect rate cuts starting in the second quarter of this year.

In a monetary policy statement, the central bank noted that although inflation began to reduce in the second half of the fiscal year 2023–2024 and decreased sharply in February, it is still at a high level and that risks to the outlook are there due to strong inflation expectations.

“This warrants a cautious approach and requires continuity of the current monetary stance to bring inflation down to the target range of 5 to 7 percent by September 2025,” the SBP’s monetary policy committee (MPC) said in a statement.

“The committee reiterated that this assessment is also contingent upon continued targeted fiscal consolidation and timely realisation of planned external inflows,” it added.

The headline inflation rate decreased from 28.3 percent in January to 23.1 percent in the previous month due to better food supplies, moderating global commodity prices, and a favourable base effect. Core inflation, which had remained stubborn, also dropped from 20.5 percent in January to 18.1 percent in February, while food inflation continued its downward trajectory.

Although year-on-year energy inflation declined in February, according to the MPC, changes in administered energy prices have continued to directly and indirectly fuel inflation.

“Going forward, any further adjustments in administered prices or fiscal measures that may push prices up pose risk to the near- and medium-term inflation outlook,” the MPC said.

“Cognisant of these risks, the committee assessed that it is prudent to continue with the current monetary policy stance at this stage,” it added.

The central bank increased its average inflation forecast for the current fiscal year to 23 to 25 percent from a previous projection of 20 to 22 percent in January because of growing gas and electricity prices.

To combat price pressures and to satisfy the requirement of the International Monetary Fund (IMF) to obtain the crucial bailout, the policy rate was last increased in June. Since September 2021, the SBP has increased interest rates by 15 percentage points.

The SBP made its policy decision when the newly elected government is in negotiations with the IMF for the second and final review of a $3 billion loan programme. This decision is the final one made before the current standby arrangement with the IMF expires in April. Pakistan also intends to secure a new larger and longer bailout package from the IMF.

The MPC expects the real GDP growth to remain in the range of 2 to 3 percent for FY24. According to its assessment, the current account deficit is most likely to stay closer to the lower end of the predicted range of 0.5 to 1.5 percent of GDP.

SBP Governor Jameel Ahmad said in an analyst briefing that the talks with the IMF over the third installment of the current loan programme were progressing.

According to the governor, the total amount of external debt that needed to be serviced in FY24 is $24.3 billion, of which $3.9 billion has been set aside for interest payments and the remaining $20.4 billion for principal repayments.

Of this total, $13.5 billion has already been either repaid or rolled over. Consequently, $10.8 billion remains payable within the remaining 3.5 months of the current fiscal year, with $2 billion already in the process of rollover, he said.

This leaves $8.5 billion outstanding, comprising $1.3 billion in interest and the rest in principal. Additionally, another $4 billion is set to be rolled over by June, resulting in a total repayment obligation of $3.5 billion by that time, inclusive of a $1 billion Eurobond payment due in April.

Looking ahead to FY25, the debt repayment is projected to be similar to that of FY24, with an estimated amount of $12 billion to be rolled over, according to Ahmad.

According to him, there is no fixed goal level for the real effective exchange rate (REER) by the SBP. Rather, monetary aggregates, global inflation, domestic inflation, and a host of other economic variables all have an impact on the REER.

The governor responded to a query on the level of SBP reserves by the end of June by saying that they are aiming for $9.1 billion, which is the level that the SBP and the IMF had agreed upon under the standby arrangement.