Daily Times

On Tuesday, the State Bank of Pakistan kept its benchmark interest rate at 9.75 percent for the next one and a half months, in line with market forecasts. Following last week’s announcement of price reductions for gasoline and electricity as part of the government’s relief package, the Monetary Policy Committee (MPC) indicated in a statement that the status quo was maintained.

It was believed that interest rates will remain unchanged after the State Bank of Pakistan (SBP) firmly indicated the same in its monetary policy announcement in January 2022. That was enough to keep inflation under control and maintain the government’s economic growth target of roughly 4.5 percent for the current fiscal year. The SBP emphasized that a rate increase would be gradual and moderate if necessary.

“This moderation should help keep at bay demand-side pressures on inflation and contain non-oil imports, notwithstanding the significant uncertainty about the future path of global energy and food prices due to the Russia-Ukraine conflict,” said the SBP. Although the State Bank of Pakistan (SBP) has tightened monetary policy, the bank expects inflation and the current account deficit to remain high in the current fiscal year.

For the whole fiscal year in December 2021, it raised increased its inflation forecast from 7-9 percent to 9-11 percent. It also increased the projection of the fiscal year’s current account deficit from 2-3pc of GDP to 4pc of GDP (gross domestic product).

It is worth noting that the current account deficit increased in January, although this was mainly due to huge imports of oil, vaccines, and other goods funded by loans and supplier credit. In the absence of these imports, the deficit would have been nearly $1 billion smaller, indicating that the underlying trend in the current account balance is also slowing.

A forward-looking view of real interest rates shows that present rates are appropriate for guiding inflation toward the medium-term target of 5-7 percent, supporting economic growth and preserving external stability.

On January 24, 2022, the SBP’s Monetary Policy Committee (MPC) voted to leave the policy rate at 9.75 percent after noting that multiple developments suggested demand-moderating measures were gathering momentum and improving the outlook for inflation.

According to MPC forward guidance at its Jan-22 meeting, real interest rates on a forward-looking basis were acceptable and any changes would be rather small.

“The MPC believed that any change in monetary policy settings would be very small,” declared the MPS at the time.

Since the last MPC, there have been a lot of important changes. Oil, coal, and wheat have all seen major price increases as a result of the Russia-Ukraine conflict.

Ismail Iqbal Securities said that crude oil has risen by 50pc, coal by 140pc, and wheat by 57pc since the last MPC.

However, the government has also planned to reduce the price of petroleum goods and electricity by Rs10 per litre and Rs4 per unit for the next four months in an effort to curb inflation.