Karachi, August 01, 2023 (PPI-OT): Central Bank Maintains Key Policy Rate at 22%, Expects Moderate

Credit Growth and Inflation Moderation

In the latest Monetary Policy Announcement (link) the State Bank of Pakistan (SBP) kept the key rate unchanged at 22%.; in in-line with our expectation (link).

Key Points and Outlook:

Inflation:

The average inflation rate for FY23 was 29.2 percent.

The MPC projects average inflation in the range of 20 – 22 percent in FY24.

Inflation is expected to fall gradually during the first half of FY24 before falling below 20 percent in the second half.

The MPC particularly noted that year-on-year inflation is likely to continue decreasing over the next 12 months, which implies a significant level of positive real interest rate.

In light of these developments, the MPC stressed maintaining an appropriately tight monetary policy stance with positive real interest rates on a forward-looking basis to keep inflation and its expectation on a downward path so as to achieve the medium-term inflation target of 5 – 7 percent by end-FY25.

Growth:

The real GDP growth in FY23 was estimated to be 0.3 percent, which is significantly lower than the growth rate in the previous two years.

The real GDP growth is projected in the range of 2.0 to 3.0 percent for FY24.

Barring unforeseen events, the MPC expects economic activity to moderately recover in FY24, supported by a rebound in rice and cotton output.

Improved business confidence and withdrawal of priority guidance on imports have improved the outlook for manufacturing, construction, and allied services.

External Sector:

The cumulative current account deficit in FY23 substantially narrowed to 0.7 percent of GDP from 4.7 percent in FY22.

The current account deficit is expected to remain contained in the range of 0.5 to 1.5 percent of GDP in FY24.

This assessment takes into account the impact of evolving domestic and global economic conditions.

The market-determined exchange rate will continue to serve as the first line of defense against external shocks and support reserve build-up.

Fiscal:

The latest data indicates that both the fiscal and primary deficits may exceed their revised estimates for FY23.

The MPC emphasized the importance of achieving the envisaged fiscal consolidation in FY24 in the context of achieving broader macroeconomic stability.

Money and Credit:

Broad money (M2) growth increased to 14.4 percent in FY23 from 13.6 percent in FY22, mainly driven by increased public sector borrowing.

Growth in private sector credit decelerated substantially in line with the slowdown in economic activity and tight monetary policy stance.

Going forward, an improved financing mix after the unlocking of multilateral and bilateral external financing along with some uptick in economic activity would provide space for a moderate expansion in private sector credit this year.