The State Bank of Pakistan (SBP) surprised financial markets on Thursday by leaving its benchmark policy rate – the cost of bank lending – unchanged at 22%, against the expectation of an aggressive hike of up to 300 basis points. In a statement, the SBP said that the Monetary Policy Committee (MPC) decided to maintain the policy rate at 22%. “This decision takes into account the latest inflation outturn reflecting the continuing declining trend in inflation from its peak of 38% in May 2023 to 27.4% in August 2023.” “Even though global oil prices have risen recently and are being passed on to consumers through adjustment in administered energy prices, inflation is projected to remain on the downward trajectory, especially from the second half of this year,” the central bank’s statement added. As such, the real interest rates continue to remain in positive territory on a forward-looking basis. Moreover, the expected ease in supply constraints owing to better agriculture output and the recent administrative measures against speculative activity in the foreign exchange and commodity markets would also support the inflation outlook, the bank argued. The MPC noted four key developments since its July meeting. First, the improvement of agriculture outlook, based on the latest data on cotton arrivals, better input conditions, and satellite data indicating healthy vegetation of other crops. Second, the global oil prices have been rising and are now hovering over $90/barrel level. Third, as anticipated, the current account posted a deficit in July after remaining in surplus for the last four months, partly reflecting the impact of the recent ease in import restrictions. Finally, recent administrative and regulatory measures aimed at improving availability of essential food commodities and curbing illegal activities in the foreign exchange market have begun to yield results. “This has helped in narrowing the gap between the interbank and open market exchange rates,” the bank maintained.