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Monetary policy: SBP hikes interest rate to 16% to curtail inflation

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  • “Decision aims to ensure elevated inflation does not become entrenched,” SBP says.
  • SBP increased rate cumulatively by 900 basis points since Sept 2021 to Nov 2022.
  • MPC says it will continue to carefully monitor developments affecting prospects for inflation, growth.

KARACHI: The Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) Friday raised the key policy rate by 100 basis points to 16% — the highest since 1999.

The central bank, in a statement, issued after the meeting said that the decision reflects the MPC’s view that inflationary pressures have proven to be stronger and more persistent than expected.

“This decision is aimed at ensuring that elevated inflation does not become entrenched and that risks to financial stability are contained, thus paving the way for higher growth on a more sustainable basis,” the MPC said.

The SBP noted that amid the ongoing economic slowdown, inflation is increasingly being driven by persistent global and domestic supply shocks that are raising costs.

“In turn, these shocks are spilling over into broader prices and wages, which could de-anchor inflation expectations and undermine medium-term growth,” the statement read, adding that consequently the rise in cost-push inflation cannot be overlooked and necessitates a monetary policy response.

The MPC further noted that the short-term costs of bringing inflation down are lower than the long-term costs of allowing it to become entrenched. Meanwhile, curbing food inflation through administrative measures to resolve supply-chain bottlenecks and any necessary imports remains a high priority.

The central bank increased the rate by a cumulative 900 basis points in 15 months (September 2021 to November 2022) to 16%.

The MPC, Since the last meeting, noted three key domestic developments, including:

  • Headline inflation increased sharply in October, food prices also accelerated significantly, and core inflation has risen further
  • A sharp decline in imports led to a significant moderation in the current account deficit in both September and October
  • After incorporating Post-Disaster Needs Assessment of floods, the FY23 projections for growth of around 2% and current account deficit of around 3% of GDP are re-affirmed.

However, the committee mentioned that higher food prices and core inflation are now expected to push average FY23 inflation up to 21-23%. 

Key projections for FY23

  • Growth rate in FY23 to clock in at 2%
  • Current account deficit to remain around 3% of GDP shared
  • Average FY23 inflation to be calculated around to 21-23%
  • Forex reserves expected to improve gradually
  • Inflation expected to fall toward upper range of the 5-7% 

External sector

The MPC mentioned that on the financing side, inflows are being negatively affected by domestic uncertainty and tightening global financial conditions as major central banks continue to raise policy rates. 

The financial account recorded a net inflow of $1.9 billion during the first four months of FY23, compared to $5.7 billion during the same period last year.

“Looking ahead, higher imports of cotton and lower exports of rice and textiles in the aftermath of the floods should be broadly offset by a continued moderation in overall imports due to the economic slowdown and softer global commodity prices,” it said.

The committee predicted the current account deficit is expected to remain moderate in FY23, with foreign exchange reserves gradually improving as anticipated external inflows from bilateral and multilateral sources materialise.

The central bank said that if the recent decline in global oil prices intensifies or the pace of rate hikes by major central banks slows, pressures on the external account could diminish further. 


Monetary and inflation outlook

As part of its forward guidance, the MPC said that it will continue to carefully monitor developments affecting medium-term prospects for inflation, financial stability, and growth.

The central bank noted that headline inflation rose by almost 3½ percentage points in October to 26.6% year-on-year, driven by normalization of fuel cost adjustments in electricity tariffs and rising prices of food items.

Energy and food prices rose by 35.2 and 35.7% year-on-year, respectively. Meanwhile, core inflation increased further to 18.2 and 14.9% year-on-year in rural and urban areas respectively, as rising food and energy inflation seeped into broader prices, wages and inflation expectations.

“As a result of these developments, inflation projections for FY23 have been revised upwards. While inflation is likely to be more persistent than previously anticipated, it is still expected to fall toward the upper range of the 5-7% medium-term target by the end of FY24, supported by prudent macroeconomic policies, orderly Rupee movement, normalising global commodity prices and beneficial base effects,” the statement read.

Moreover, it was noted that in line with the slowdown in economic activity, private sector credit continued to moderate, increasing only by Rs86.2 billion during the first quarter of the fiscal year 2022-23 compared to Rs226.4 billion during the same period last year.

The central bank attributed this deceleration to a significant decline in working capital loans to wholesale and retail trade services as well as to the textile sector in the wake of lower domestic cotton output, and a slowdown in consumer finance. 

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Pakistan’s gold price increases by an additional Rs. 800 per tola.

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The price of yellow metal in the local market hit Rs247,300 on the first working day of the week, following a rise of Rs800 in a single day.

The cost of ten grams of 24-karat gold increased by Rs686 on Monday, making the current price Rs212,020.

In addition, the cost of 10 grams of 22-karat gold increased significantly, trading at Rs194,351.

These fluctuations are strongly correlated with shifts in the US dollar’s value, demonstrating the tight connection between gold prices and exchange rates. This emphasizes how local gold markets are impacted by variables related to the global economy.

The price of the precious metal dropped $16 on the international market on Monday, hitting $2,348 per ounce.

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A delegation from Pakistan travels to the US to bargain with the IMF for a new loan.

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The Pakistani delegation consists of the Governor of the State Bank of Pakistan, the Secretary of Finance, the Additional Secretary, and other individuals.

The Finance Minister was greeted at the airport by Pakistan’s Ambassador to the United States, Masood Khan, and Embassy staff.

The Finance Minister will meet with representatives of the World Bank and IMF while he is in the US.

The IMF and Pakistan are expected to negotiate next week, according to sources.

Sources claim that Islamabad will apply for a new credit package from the IMF.

The Finance Minister’s itinerary also includes meetings with members of think tanks and the world press.

Last month, Pakistan and the IMF came to a staff-level agreement over the third and final review of the $3 billion stand-by arrangement. Should the board of the global lender approve this deal, Pakistan will get approximately $1.1 billion.

Although a specific date has not been determined, the IMF board is anticipated to evaluate the case in late April, according to a spokeswoman.

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Pakistan’s petrol prices are anticipated to rise.

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The Oil and Gas Regulatory Authority (OGRA) will not disclose the anticipated increase in fuel prices until its work is finished, according to sources.

Prime Minister Shehbaz Sharif will receive the summary of the petrol price, and sources further stated that the new pricing will be revealed following his approval today.

Noteworthy to highlight is that Pakistan was previously ordered by the International Monetary Fund (IMF) to impose an 18% General Sales Tax (GST) on gasoline.

Details indicate that Pakistan was requested by the Monetary Fund to stop reducing sales tax on all goods, including gasoline.

To boost tax revenue, Pakistan’s recently elected government should impose a sales tax on petroleum items in addition to a Rs 60 charge.

High-speed diesel (HSD) was reduced by Rs3.32 per litre on March 31 but petrol prices increased by Rs9.66 per litre by the government.

In contrast to the reduction in the price of high-speed diesel (HSD) to Rs282.24 from Rs278.92, the price of gasoline jumped to Rs289.41 per litre.

The adjustments were brought about by a commensurate increase in the price of gasoline and a decline in the price of HSD on the global market, according to a statement released by the Finance Ministry.

According to the statement, the adjustment was made in accordance with government policy, which transfers pricing differences from the foreign market to the home market.

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