The State Bank of Pakistan (SBP) on Monday decided to maintain the status quo by keeping the key policy rate unchanged at 22% for the seventh time in a row. In its meeting, the Monetary Police Committee (MPC) noted that the macroeconomic stabilisation measures are contributing to considerable improvement in both inflation and external position, amidst moderate economic recovery. “However, the MPC viewed that the level of inflation is still high. At the same time, global commodity prices appear to have bottomed out with resilient global growth,” as per a statement issued following the meeting. The MPC said recent geopolitical events have also added uncertainty about their outlook. Moreover, the upcoming budgetary measures may have implications for the near-term inflation outlook, it added. On balance, the committee stressed on continuation of the current monetary policy stance to bring inflation down to the target range of 5 to 7% by September 2025. The MPC said data for the first half of fiscal year 2024 suggested that economic activity is recovering at a moderate pace, led by strong rebound in agriculture sector. Moreover, the current account recorded a sizable surplus in March 2024, which helped to stabilise the SBP’s foreign exchange reserves despite substantial debt repayments and weak financial inflows, as per the communique. “Third, inflation expectations of consumers inched up in April 2024, whereas those for businesses declined. And lastly, leading central banks particularly in advanced economies have adopted cautious policy stance after noticing some slowdown in the pace of disinflation in recent months.” It further said that incoming data continues to support the MPC’s earlier expectation of a moderate recovery in this fiscal year with real GDP growth projected to remain in the range of 2 to 3%. Agriculture sector remains the key driver with robust 6.8% growth in the first half of FY24. In the industrial sector, large-scale manufacturing reported a 0.5% decline in July-February FY24 compared to 4.0% contraction recorded in the same period last year while the services sector’s growth in the first half was slightly lower than expected, reflecting the impact of subdued demand. The current account has turned out better than expected, recording a sizable surplus of $619 million in March 2024, mainly owing to the Eid-related surge in workers’ remittances. Cumulatively, the current account deficit narrowed by 87.5% to $0.5 billion during July-March FY24 as compared to the same period last year. “Exports continue to exhibit steady growth – led by rice – while imports have decreased in the wake of better domestic agriculture output and moderate economic activity.” said the MPC. The reduction in the current account deficit – amidst weak financial inflows – allowed SBP to make sizable debt repayments, including that of a $1 billion Eurobond, while sustaining the SBP’s forex reserves around $8.0 billion, as per the statement. “The MPC emphasised that a further build-up in FX buffers is essential to enhance the country’s ability to effectively respond to external shocks and support sustainable economic growth.” In line with the MPC’s expectations, inflation has continued to moderate noticeably in the second half of the FY24. It said headline inflation in March declined to 20.7% year-on-year from 23.1% in February. In the same period, core inflation fell significantly to 15.7% from 18.1% in February. Besides the coordinated tight monetary and fiscal policy response, other factors that have led to this favorable outcome include lower global commodity prices, improved food supplies and high base effect. The MPC expected inflation to continue to remain on downward trajectory. However, the MPC also noted that this inflation outlook is susceptible to risks emanating from the recent global oil price volatility along with bottoming out of other commodity prices; potential inflationary impact of resolution of circular debt in the energy sector; and tax rate-driven fiscal consolidation going forward. “Cognizant of these risks, the Committee assessed that it is prudent to continue with the current monetary policy stance at this stage, with significant positive real interest rates.”