Karachi, March 09, 2022 (PPI-OT): MPS: Status quo maintained… for now
SBP has kept the policy rate unchanged as outlook for inflation has improved since the last MPC meeting after the relief package will keep fuel and electricity prices contained in the near term. Moreover, the high frequency indicators have exhibited a declining trajectory, pointing towards moderation in economic growth momentum.
SBP has stated that the decision to maintain rates is appropriate to be able to guide inflation to the 5-7% range. The key risk is the unfolding of the Ukraine conflict as it poses challenges to the outlook of commodity prices and global financial condition.
SBP acknowledged the risks and highlighted that it stands ready to take measures required in response to the unfolding situation, including but not limited to, calling an emergency meeting before the next scheduled MPS on Apr19’22, if required.
Policy rate kept at 9.75%
SBP has kept the policy rate unchanged as outlook for inflation has improved since the last MPC meeting as the relief package will keep fuel and electricity prices contained in the near term. Moreover, the high frequency indicators e.g. FMCG, cement sales, etc and real money (M2) balances have exhibited a declining trajectory, pointing towards moderation in economic growth momentum.
This is also evident from the decline in trade deficit for Jan-2022 and Feb-2022 after the monthly peak of Nov-2021, adjusting for the funded imports in-kind which do not impact the Balance of Payment position; pointing towards sustainability of CAD improvements.
Major contribution for imports growth during Jul-Jan’22 has come from oil and agriculture (vaccines) which is less responsive to policy stance. However, remittance growth has been strong despite a low Jan-2022 number; where rising trend in workers movement to Middle East keeps remittance growth prospects afloat.
Weakening of Rs/US$ over the last few months continues to act as a shock-absorber to current account slippages; however, the rising commodities prices continue to dent the current account position. With US$1.2bn of non-oil CAD in Jan-2022, Jul-Jan’22 non-oil CAD now stands at US$0.6bn. This number may likely jump, going forward, considering the conflict in Ukraine continues to push prices of other commodities higher.
Growth targeted at mid 4-5% range
Monetary tightening that started since Sep-2021 has been yielding the results of demand moderation and narrowing trade gap. Currently, the movement in trade gap is primarily owing to prices instead of volumes. Simultaneously, cotton arrivals are lower than expectations and some agricultural inputs are weaker from last year, which point towards mixed prospects for Rabi season. Similarly, wheat output will also be lower than initial estimates of SBP. FY22 growth forecast now stands in the middle of 4-5% range.
SBP has stated that the decision to maintain interest rates is appropriate to be able to guide inflation to the 5-7% range. Key risk is the unfolding of the Ukraine conflict. It could pose challenges to the outlook for international commodity prices and global economy.
Ukraine conflict can lead to an emergent meeting
Oil prices have reached GFC 2008 levels owing to Russia’s tensions with Ukraine. Since the last MPC, biggest development has been this major geo political event. This has produced a deep wrinkle in economic progress of the entire globe, including Pakistan.
SBP acknowledged the risks and highlighted that it stands ready to take measures required in response to the unfolding situation, including but not limited to, calling an emergency meeting before the next scheduled MPS on Apr19’22, if required.