F.P. Report
KARACHI: In line with market expectations, the State Bank of Pakistan (SBP) maintained the key interest rate at 22% for the fourth straight Monetary Policy Committee (MPC) meeting as it awaits for the impact of previous hikes to filter through the economy and further tame high retail inflation.
The bank’s monetary policy committee said that an increase in gas prices last month could affect the inflation outlook. “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 State Bank of Pakistan (SBP) said in the statement.
The rate was raised to 22% in an off-cycle meeting in June as a last-gasp attempt to secure a $3 billion bailout from the International Monetary Fund (IMF) as part of a reforms programme aimed at bringing stability to the troubled $350 billion economy. Pakistan’s economy has been beset by high price pressures, with monthly consumer price index-based inflation remaining above 20% since June 2022, and hitting a record high of 38% in May 2023.
The bank and the IMF both say they expect inflation to ease in the current financial year ending in June 2024, but inflation remained at 29.2% in November after energy prices were hiked to meet reform targets. “Barring further sizable increase in administered prices, the MPC continues to expect that headline inflation will decline significantly in the second half of FY24,” the bank said.
High borrowing costs have slowed economic growth, which stands at about 2%, but investors say they have already priced in a peak in interest rates and the expected successful completion of the IMF programme has buoyed stock markets and the currency. Ahead of the IMF bailout in July, Pakistan had to commit to a slew of measures demanded by the IMF, including revising its budget, demonstrating promises of foreign funding, and increasing electricity and natural gas prices.
The IMF has released $1.2 billion in funds. Under a staff-level agreement reached last month, the fund is set to release another $700 million once approved by its board on January 11. The country’s foreign reserves have improved, growing to around $7 billion – enough to cover 1.4 months’ worth of imports and up from $4.4 billion in July.
