SBP holds rates, hints at early MPC meet if needed

KARACHI: State Bank of Pakistan (SBP) on Tuesday held its benchmark interest rate steady for the second meeting in a row as inflationary concerns cooled a bit, but it did hint at the possibility of an early huddle in case any economic fallout of Russia-Ukraine war spills over into the country.

Besides, the inflation stablised in low double digits in February, at this point the SBP is opting to wait and see how geopolitical situation evolves and where the global commodity prices will settle.

The SBP’s monetary policymakers see Russia invasion of Ukraine as a new source of uncertainty noting global energy costs are spiralling, which could affect the inflation and current account expectations and need adjustment in the policy rate.

There is no problem for the Monetary Policy Committee (MPC) to meet in an extraordinary way, not to wait until the next monetary policy meeting, the policy statement said.

“Looking ahead, the MPC noted that while current real interest rates on a forward-looking basis are appropriate to guide inflation to the medium-term range of 5-7 percent, support growth, and maintain external stability, the Russia-Ukraine conflict has introduced a high degree of uncertainty in the outlook for international commodity prices and global financial conditions,” the SBP said in a monetary policy statement.

“Continued adverse conditions on these fronts could pose challenges to the outlook for the current account deficit and inflation expectations, which could necessitate changes in the policy rate. Since the Russia-Ukraine situation remains fluid, the MPC noted that it was prepared to meet earlier than the next scheduled MPC meeting in late April, if necessary, to take any needed timely and calibrated action to safeguard external and price stability.

The SBP maintained the policy rate at 9.75 percent, as expected, in view of an improvement in the outlook for inflation following the cuts in fuel prices and electricity tariffs announced last week as part of the government’s relief package.

The SBP’s MPC sees the economic growth to continue to moderate to a more sustainable pace as suggested by high-frequency indicators. This moderation should help prevent demand-side pressures on inflation and contain non-oil imports, despite the significant uncertainty about the future path of global energy and food prices due to the Russia-Ukraine conflict, according to the SBP’s statement.

The SBP expects growth to remain at 4.5 percent this fiscal year.

Headline inflation moderated in February to 12.2 percent year-on-year from 13 percent in the previous month. The MPC still expects inflation to average between 9-11 percent this fiscal year before declining toward the medium-term target range of 5-7 percent in FY2023 as global commodity prices normalise. But at the same time, it said this baseline outlook was subject to risks from the path of global prices, domestic wage developments, and the fiscal policy stance.

Trade deficit is also moderating as non-oil imports have now started to reduce, the MPC noted.

Despite the rise in global prices, the February trade deficit saw a further 10 percent month-on-month contraction on top of the 29 percent decline recorded in January, confirming the slowdown in domestic demand.

“While the current account deficit rose in January, this largely reflected lumpy imports of oil, vaccines, and other items financed through loans and supplier credit. Excluding these imports, the deficit would have been about $1 billion lower, suggesting that the underlying trend in the current account balance is also moderating,” it said.

The current account deficit rose to $2.6 billion in January on the back of a sizeable contribution from imports financed through loans and supplier credit, including oil and vaccines.

“Since these imports are concurrently financed with offsetting inflows in the capital and financial account, they do not undermine sustainability of the current account,” it said.

“Remittances fell marginally in January, partly reflecting seasonality, but have grown in line with expectations so far this fiscal year. Looking ahead, the non-oil current account deficit is expected to decline, as import growth continues to slow with moderating demand, while exports and remittances remain resilient,” it added.

The SBP sees the outlook for the overall current account deficit dependent on the future course of international oil prices.

The SBP said the relief package was expected to be deficit neutral, consistent with Pakistan’s remarkable adherence to fiscal discipline through the Covid shock.

“Under the assumption that the recently announced relief package will not add to the fiscal deficit due to other offsetting savings, inflation should be lower through the rest of the fiscal year than earlier estimated,” the central bank said in the policy announcement note.