MPS: SBP to remain data dependent

August 24, 2022 (MLN): Inline with market’s expectation, State Bank of Pakistan (SBP) kept policy rate unchanged at 15% in yesterday’s monetary policy meeting, citing moderation in domestic demand and improvement in external account position.

After six consecutive rate hikes, SBP put a rate hike on hold as the full impact of a cumulative 800bps increase in policy rate since September last year, is yet to transpire into the system.

SBP also highlighted that future guidance of monetary policy direction should not be linked to the pause, as future decisions on policy rate will be data driven and will be dependent on country’s evolving situation.

“The central bank is currently awaiting more data points but stands prepared in case more policy interventions maybe needed”, analyst at AKD Securities said.

In its last MPC meeting in July, SBP announced a sharp hike of 125 bps in policy rate since then, a gradual change in the macroeconomic environment has been noted with moderation in domestic demand, significant decline in June’s trade deficit due to low import bill, a recent inflation reading though high but in line with market expectations and the expected disbursement of $1.2bn tranche from the IMF after the board approval.

The central bank is confident that current monetary settings are appropriate and the threat of economy overheating will likely subside by FY23 end and real GDP growth will converge to its long-term trend, analyst at AKD said.

The SBP also outlined its key economic indicators for FY23 where the central bank expects real sector growth remain in the range of 3% to 4%, CPI inflation in the range of 18% - 20%, CAD at around 3% of GDP and primary surplus at 0.2% of GDP.

The SBP stated that the headline inflation is expected to remain elevated in first quarter of the current fiscal year as their top priority in the coming months would be to curb food inflation through supply side measures thus boosting output and resolving supply chain bottlenecks, after which inflation is expected to decline gradually to SBP’s FY23 inflation target of 18-20%.

Moreover, SBP noted that most demand indicators have shown a major slow down such as cements, steels, auto and POL sales have started decelerating. LSM growth has halved as compared to same time last year. Additionally, the recent floods pose a downside risk to agriculture output.

Going forward, SBP expects foreign reserve to prop up to $16bn by FY23 end from $7.9bn on 12th August 2022 by containing current account deficit to 3% of GDP, lesser energy imports and moderating domestic demand. This will also ease pressure of PKR.

“The recovery in PKR, declining international commodity prices, and actions like curtailing imports and fiscal consolidation are expected to work their way through the system over the coming months which will allow the SBP to consolidate the policy rate at the current level,” analyst at Abbasi and Company said.

Copyright Mettis Link News