Karachi, July 28, 2021 (PPI-OT): MPC highlights imminent improvement in forex reserves

In its meeting on Tuesday July 27, 2021, the Monetary Policy Committee (MPC) decided to keep the Policy Rate unchanged at 7% (last changed in Jun-2020), in-line with our expectations. The State Bank of Pakistan (SBP) conducted a post Monetary Policy Committee Analyst briefing yesterday. We share the briefing’s key takeaways.

Despite slight deterioration expected on the external account, MPC expects SBP’s foreign exchange reserves to improve in FY22 in light of external financing needs being more than fully met for the current fiscal year. This includes SDR allocation to the tune of US$2.8bn to be received in Aug-2021 from IMF.

While the MPC highlights signals of growth recovery, expectations of output in FY22 remains unchanged, leading to demand side pressure on inflation. Conversely, TERF disbursements during FY22E aggregate to Rs273bn, versus Rs163bn made in FY21, leading to further increase in capacity of the economy.

Going forward, the MPC aims to maintain an accommodative monetary policy strategy and gradually take real interest rates in the positive zone over time. However, pressures on inflation (also from higher commodity prices) and/or on the external account may lead to earlier adjustments in the monetary policy – nonetheless growth will remain a priority.

Given uncertainty persisting amid the fourth wave of COVID-19, we expect MPC to continue with its existing strategy of supporting economic activity with no change in interest rates in the ongoing calendar year. While SBP has shared a CPI forecast of 7-9% for FY22, key risks to our base case are increase in international oil prices and domestic energy tariffs.