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MPS preview: SBP will likely keep policy rate unchanged at 15%

SBP to issue new currency notes
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November 24, 2022 (MLN): The State Bank of Pakistan’s Monetary Policy Committee (MPC) is scheduled to meet tomorrow wherein the market participants expect MPC to keep the policy rate unchanged at 15%.

MPC in its last meeting held on October 11, 2022, did not change the policy rate saying that the existing monetary policy stance strikes an appropriate balance between managing inflation and maintaining growth in the wake of the floods.

On the one hand, inflation could be higher and more persistent due to the supply shock to food prices, and it is important to ensure that this additional impetus does not spill over into broader prices in the economy. On the other, growth prospects have weakened, which should reduce demand-side pressures and suppress underlying inflation.

Considering the above statement and the continuous slowdown in economic activity following the earlier fiscal and monetary contraction which can be witnessed from the declining trend of growth indicators such as cement sales, car sales, and OMC plunged by 20% YoY, 47% YoY, and 22% YoY in 4MFY23. Likewise, the Large scale Manufacturing Index (LSMI) remained flat in 3MFY23. Similarly, the agriculture sector is also facing the worst fate of all time due to devastating floods.

It is also pertinent to mention that the 4MFY23 current account deficit has dropped 47% YoY compared to the SPLY, mainly on account of lower imports while net foreign direct investment also decreased by 39% YoY.

With regards to inflation, the central bank is closely monitoring the inflation trajectory as mentioned by MPC in its previous meeting. Given the supply-side shock, inflation will likely remain on an upward trajectory.

The consumer price index (CPI) for the month of Oct 2022 increased by 26.6% YoY mainly due to FCA adjustments and the hike in food prices hike which had taken the average inflation for 4MFY23 at 25.5% compared to 8.74% in 4MFY22.

The help of the contained current account deficit, and inflow of $1.5 billion from the Asian Development Bank (ADB) under its Building Resilience with Active Countercyclical Expenditures (BRACE) Program to support Pakistan's economy provided stable ground to the Pakistani rupee (PKR) against US dollar. Since the last MPS, depreciated by 2.7%.

Moreover, SBP is of the view that given secured external financing and additional commitments in the wake of the floods, FX reserves should improve through the course of the year. At present, the SBP’s FX reserves stood around $8bn while the total FX reserves clocked $13.80bn as of November 11, 2022.

In the backdrop of devastating floods, and upcoming Sukuk payments which are due on December 5, 2022, the country immediately needs foreign exchange inflows while at the same time the delay in IMF’s 9th review due to a lack of clarity on flood-related financial requirements and declining revenue stream is not a good sign for the country.

Based on the above-discussed scenarios, most of the market participants believe that SBP will keep the policy rate unchanged. In a survey conducted by MG News, the majority of the brokerage houses and financial experts expect a status quo in tomorrow’s MPC meeting.

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Posted on: 2022-11-24T17:18:04+05:00