Karachi, July 28, 2021 (PPI-OT): Monetary Policy Statement: Policy Rates Maintained at 7.0% to Support Growth; Amid Improved Inflation Outlook
The State Bank of Pakistan (SBP) in its latest Monetary Policy Statement (MPS) announcement for the next two months on Tuesday 28th July, 2021 kept policy rate ‘unchanged’.
Outlook for growth remains favourable as indicated by external balance and recovering industry statistics.
Monetary policy to remain unchanged in the near term as SBP waits for economic recovery to consolidate. Moreover, any potential adjustments will be introduced in a ‘gradual’ fashion to achieve mildly positive real interest rates.
Going forward we expect inflation to moderate between 5-7% by 1HFY22 however we do not expect a rate hike anytime sooner as SBP continues to exercise vigilance over supply and demand side shocks led by new Covid 19 virus strains as well as Balance of Payment situation.
Status quo maintained
The State Bank of Pakistan (SBP) in its latest Monetary Policy Statement (MPS) announcement for the next two months on Tuesday 28th July, 2021 kept rate ‘Unchanged’ at 7.0%.
The decision is in-line with market participants, with majority expecting an unchanged status.
Inflation to dissipate in medium term
The press release (https://www.sbp.org.pk/press/2021/Pr-27-Jul-2021.pdf) on monetary policy highlighted favourable growth trends amid well contained inflationary pressures which has largely been driven by supply side pressures from food sector and administrative decisions on the energy sector.
Medium term inflation is expected to fall in the target range of 5-7% by 1HFY 22 with a visible decline in essential food commodity prices since Jun-21 and elimination of high base effect of electricity tariff Feb-22 onwards. Growth projections have enhanced to 4-5% from 3.9% in FY21.
Comfortable outlook on current account balance in FY22
Current account deficit is expected to remain in a sustainable range of 2-3% of GDP in FY22 as compared to much higher deficits of 4% and 6% in FY17 and FY18 respectively. This coupled with a projection of a rise in FX reserves owing to continued inflows from overseas Pakistanis, recent inflow of USD 1bn from issuance of international bonds with previous inflow brought in by the same of USD 2.5bn, expected addition of USD 2.8bn from IMFs SDR collection in Aug-21 and support from moderately stable exports volume is expected to maintain external stability for the economy.
Outlook
For the remainder of FY22, we view SBP is likely to maintain an accommodative stance in policymaking in order to provide room for both fiscal consolidation and recovery durability. However will remain cautious with respect to any indication of overheating in the economy and balance of payment crisis alongside any inflationary pressures due to supply side shocks arising from new strains of Covid-19 on the domestic and international front.
Hence, we are of the view that SBP will continue to keep policy rate unchanged at current level of 7% at least till 1hFY22 and is likely to make the first move of 50-100bps to 7.5-8.0%.