KARACHI, Mar 18 (APP):State Bank of Pakistan (SBP), on Monday, cautiously decided to keep policy rate at 22 per cent on pretext of elevated inflation expectations that required continuity of the current monetary stance to bring inflation down.
The Monetary Policy Committee (MPC) also emphasized on timely realization of planned external inflows along with continued targeted fiscal consolidation for ensuring overall macroeconomic and price stability, said a statement issued after the MPC meeting here at SBP.
The MPC noted that that inflation declined noticeably from second half of fiscal year 2023-24, in line with earlier expectations, however, despite the sharp deceleration in February, the level of inflation remained high and its outlook was susceptible to risks amidst elevated inflation expectations.
The committee decided to keep the policy rate unchanged noting that inflation expectations warranted a cautious approach and required continuity of the current monetary stance to bring inflation down to the target range of 5-7 percent by September 2025.
The MPC noted that headline inflation registered a broad-based and considerable year on year decline from 28.3 percent in January to 23.1 percent in February, food inflation continued to trend down and core inflation also decelerated to 18.1 percent in February from 20.5 percent in January.
The committee viewed that improvement in inflation broadly reflects the combined impact of contractionary monetary policy, fiscal consolidation, better food supplies, moderating global commodity prices and favorable base effect.
The MPC noted that while energy inflation also decelerated on yearly basis in February, the adjustments in administered energy prices have continued to contribute to inflation directly and indirectly and had implications for the needed sustained decline in inflation expectations of both consumers and businesses.
The MPC was of the opinion that any further adjustments in administered prices or fiscal measures that may push prices up pose risk to the near and medium term inflation outlook and being cognizant of the risks the committee assessed that it was prudent to continue with the current monetary policy stance at this stage.
The MPC reviewed that the latest data continued to depict moderate pick-up in economic activity, led by rebound in agriculture output while external current account balance was turning out better than anticipated and has helped maintain foreign exchange buffers despite weak financial inflows.
Inflation expectations of businesses have shown a steady increase since December, those for consumers have also inched up in March, the MPC observed adding that on the global front, while the broader trend in commodity prices remained benign, oil prices have increased partly reflecting the continued tense situation in the Red Sea.
Moreover, amidst uncertainty regarding the inflation outlook, key central banks in both advanced and emerging economies have continued to maintain a cautious monetary policy stance in recent meetings, it said.
In the Real Sector incoming data supported the MPC’s earlier expectation of moderate recovery in economic activity in FY24 with real GDP growth to remain in the range of 2 to 3 percent, the MPC noted and added that agriculture sector remained the key driver with strong performance of Kharif crops especially cotton and rice while prospects for wheat crop also look promising due to increase in area under cultivation, better input conditions, and higher output prices.
Denser vegetation of wheat crop, as captured by satellite images, also support this assessment, the statement added.
In the industrial sector, large-scale manufacturing- despite a slight decline of 0.5 percent during July-January- was expected to recover in the coming months due to improved capacity utilization and employment conditions and favorable base effect.
Furthermore, knock-on impact of commodity producing sectors and other leading indicators point towards gradual recovery in the services sector, the MPC noted.
Reviewing the External Sector, the committee observed that current account recorded a deficit of $269 million in January 2024. That resulted in a cumulative deficit of $1.1 billion during July-January FY24, which is down by around 71 percent year on year basis.
The MPC noted that the improvement largely owes to narrowing of the trade deficit, driven by both an increase in exports and a decline in imports. The committee observed that exports have risen on the back of higher food exports, whereas import payments have remained subdued due to better domestic agriculture output, moderate domestic demand and supportive global commodity prices.
Moreover, workers’ remittances have been rising consistently on yearly basis since October 2023, supported by incentives and regulatory reforms to channelize inflows via formal channels.
Financial inflows showed a modest decline in January amid continuing public debt repayments in the absence of significant official and private sector inflows, the MPC noted and assessed that the current account deficit is likely to remain closer to the lower bound of 0.5 to 1.5 percent of GDP forecast range for FY24, which will support the foreign exchange (FX) reserves position.
The MPC observed that the latest data on fiscal accounts shown continuing fiscal consolidation as during H1-FY24, the primary surplus improved to 1.7 percent of GDP from 1.1 percent in the same period last year, while the overall fiscal deficit deteriorated to 2.3 percent of GDP from 2.0 percent in H1-FY23.
“Improvement in the primary surplus to GDP ratio is mainly contributed by better revenue collection, primarily from non-tax sources, and relatively contained non-interest expenditures,” the committee said adding that sizeable increase in interest payments amidst high debt levels and increasing reliance on costly domestic financing led to an expansion in the overall deficit.
The MPC emphasized that the continuation of fiscal consolidation was essential for ensuring overall macroeconomic and price stability. Since the last MPC meeting, as expected, the yearly broad money (M2) growth has moderated to 16.1 per cent in February 2024 from 17.8 per cent in December owing to lower growth in net domestic assets of the banking system mainly due to a broad-based contraction in private sector credit and commodity financing operations.
The MPC also noted that the growth in reserve money continued to decelerate sharply to 8.2 percent in February. Moreover, the currency to deposit ratio continued to decline due to the strong growth in bank deposits along with a declining trend in currency in circulation, the committee observed and termed the trends in monetary aggregates positive for the inflation outlook.
