KARACHI (Daily Point) — In line with market expectations, the State Bank of Pakistan (SBP) has maintained interest rate at 22 per cent for the fourth consecutive Monetary Policy Committee (MPC) meeting.
The decision aligns with the central bank’s strategy to allow previous rate hikes to permeate the economy and address soaring retail inflation.
The SBP’s monetary policy committee acknowledged the recent increase in gas prices, highlighting its potential impact on the inflation outlook. In a statement, the SBP noted, “The decision does take into account the impact of the recent hike in gas prices … the Committee viewed that this may have implications for the inflation outlook, albeit in the presence of some offsetting developments.”
The interest rate was raised to 22% during an off-cycle meeting in June, representing a final effort to secure a $3 billion bailout from the International Monetary Fund (IMF) as part of a broader reforms program aimed at stabilizing Pakistan’s $350 billion economy.
Pakistan has grappled with persistent inflationary pressures, with the monthly consumer price index-based inflation exceeding 20% since June 2022, reaching a record high of 38% in May 2023. Both the SBP and the IMF anticipate a gradual easing of inflation in the current financial year ending in June 2024. However, inflation stood at 29.2% in November, following energy price hikes to meet reform targets.
The MPC expressed optimism that, barring significant increases in administered prices, headline inflation would witness a substantial decline in the second half of FY24.
While high borrowing costs have contributed to a slowdown in economic growth (currently at about 2%), investors have factored in the anticipated peak in interest rates. The successful completion of the IMF program has bolstered stock markets and the currency.
Before securing the IMF bailout in July, Pakistan committed to a series of measures, including budget revisions, demonstrating foreign funding commitments, and raising electricity and natural gas prices. The IMF has released $1.2 billion in funds, with an additional $700 million set for release pending approval by its board on January 11.
Pakistan’s foreign reserves have shown improvement, growing to approximately $7 billion, covering 1.4 months’ worth of imports, up from $4.4 billion in July. The SBP anticipates that the successful completion of the first review of the IMF program will likely enhance financial inflows and improve the foreign exchange reserves position, as stated in Tuesday’s announcement.
