Karachi, September 21, 2021 (PPI-OT): Monetary Policy Statement: Rate hiked by 25bps amid deteriorating Current Account Deficit and rising Inflation Outlook
The State Bank of Pakistan (SBP) in its latest Monetary Policy Statement (MPS) on Monday 20th September, 2021, announced a rate hike of 25bps to 7.25% for the next two months.
Medium term inflation is expected to escalate further with a visible uptick in essential food commodity prices and import driven upward inflationary pressures.
Growth projections have been enhanced to the upper bound of the forecasted range of 4-5% owing to promising broad based growth indictors.
For the remainder of FY22, we view monetary policy to remain accommodative to achieve sustainable growth target of 4-5% while keeping C/a deficit manageable. Thus, SBP is likely to gradually increase Policy rates to achieve mildly positive real rates over while monitoring any demand side shocks such as substantial rise in commodity prices.
A Shift in Policy making: Rate hiked by 25 bps to 7.25%
The State Bank of Pakistan (SBP) in its latest Monetary Policy Statement (MPS) on Monday 20th September, 2021, announced a rate hike of 25bps to 7.25% for the next two months. The SBP decision was backed by demand side inflationary pressures and need to counter slippages in current account deficit while focusing on achieving sustainable growth target.
Demand side inflationary pressures on the rise
The press release (link) on monetary policy highlighted increasing Current Account deficit amid a swelling import bill which has contributed to downward pressure on the PKR.
Medium term inflation is expected to escalate further with a visible uptick in essential food commodity prices and import driven upward inflationary pressures. Growth projections have been enhanced to the upper bound of the forecasted range of 4-5% owing to promising broad based growth indictors.
Countering slippage in the PKR as the current account deficit balloons
Current account deficit has swelled to USD 1.5bn in Aug-21 owing to rise in international commodity prices and aggressive domestic demand resulting in overwhelmingly high import volumes.
While SBPs gross FX reserves have posted 3x growth to arrive at USD 20bn with major contributions 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, addition of USD 2.7bn from IMFs SDR collection in Aug-21 and support from moderately stable exports volume, the widening current account deficit remains a key concern which has been so managed by flexible exchange rate regime to absorb pressure on forex reserves. Therefore the SBP deemed it appropriate to divert pressure from the currency by employing monetary tightening policy to contain the trade gap to prevent further slippage of the PKR.
Outlook
For the remainder of FY22, we view monetary policy to remain accommodative to achieve sustainable growth target of 4-5% while keeping C/a deficit manageable. Thus, SBP is likely to gradually increase Policy rates to achieve mildly positive real rates over while monitoring any demand side shocks such as substantial rise in commodity prices.