MPC to meet today, no change in policy rate expected

October 30, 2023 (MLN): Despite the expected respite in October’s inflation number, the Monetary Policy Committee of the State Bank of Pakistan (SBP) is likely to maintain its stance by keeping the policy rate "Unchanged" in today's meeting.

Since the IMF review is scheduled on November 2, and the SBP would not like to upset the fund by initiating an interest rate reduction.

In its staff report, the IMF explicitly recommended that the government to adopt a contractionary policy.

The fund said that the SBP stopped policy rate hikes prematurely, hoping that inflation had reached its peak and would soon decline, this inconsistent monetary policy also had a negative impact on the economy.

It is important to note that MPC kept policy rate unchanged in the last meeting on September 14, citing the declining trend in inflation from its peak of 38% in May to 27.4% in August 2023.

According to the estimations, the CPI for October will be dropped to 27.4% mainly on the back of high base effect coupled with a significantly lower pace of MoM increase as compared to the 12-month average of 3.2% MoM.

Accordingly, this will take the average inflation of 4MFY24 to 28.37% YoY compared to 25.48% YoY in 4MFY23.

It is important to note that Since September 2021, SBP has been increasing the policy rate by 1500 basis points but the real interest rate is still hovering in the negative territory at 4.42%.

According to the latest poll conducted by Mettis Link News, market participants are largely expecting no change in policy rate.

On the IMF front, the fund seems happy with the caretaker government as they have been jointly monitoring the fiscal and foreign exchange reserves targets set under the $3 billion loan program.

To note, Pakistan is under an IMF program of a $3bn loan which was signed in June 2023.

While $1.2bn has already been disbursed, the remaining amount is phased over the program's duration, subject to two quarterly reviews, with the next review on November 02, 2023.

For this, the governor SBP in his post MPC briefing on September 14, 2023, categorically highlighted that all quantitative performance targets related to SBP which includes Net Domestic Assets (NDA), Swaps and Net International Reserves have been met.

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