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SBP Holds Policy Rate Steady at 22% to Sustain Stability Amid Fiscal Consolidation Focus

The Monetary Policy Committee (MPC) convened on March 18, 2024, and decided unanimously to maintain the policy rate at 22 percent. The Committee acknowledged a notable decline in inflation from the latter half of FY24, aligning with earlier projections. Despite this moderation, inflation levels remain elevated, prompting a cautious approach. To achieve the target range of 5–7 percent by September 2025, the Committee deemed it necessary to sustain the current monetary stance, contingent upon continued targeted fiscal consolidation and timely realization of planned external inflows.

Recent developments were noted, including a moderate uptick in economic activity led by a resurgence in agricultural output, better-than-expected performance in the external current account balance aiding in maintaining FX buffers, and a cautious stance maintained by major central banks globally due to uncertain inflation outlooks.

SBP jacks up policy rate by 300 bps to 20% - Mettis Global Link

In terms of the real sector, recent data reaffirmed the MPC’s earlier projection of a gradual economic recovery in FY24, with real GDP growth expected to range between 2 – 3 percent. The agriculture sector continues to be the primary driver, with promising prospects for the wheat crop and indications of a forthcoming rebound in large-scale manufacturing. Furthermore, leading indicators suggest a gradual recovery in the services sector.

On the external front, January 2024 witnessed a current account deficit of $269 million, contributing to a cumulative deficit of $1.1 billion during July-January FY24, marking a significant year-on-year decrease. This improvement was attributed to a narrowing trade deficit, increased exports, and reduced imports, supported by improved domestic agriculture output and moderate domestic demand. Regulatory reforms and incentives have facilitated consistent year-on-year rises in workers’ remittances since October 2023, further supporting the current account balance.

Fiscal data indicates ongoing consolidation efforts, with a primary surplus improvement to 1.7 percent of GDP in H1-FY24, driven by enhanced revenue collection and contained non-interest expenditures. However, reliance on domestic financing led to a widening overall fiscal deficit. Sustaining fiscal consolidation is deemed essential for ensuring macroeconomic and price stability.

In terms of money and credit, broad money (M2) growth moderated to 16.1 percent in February 2024, primarily due to a contraction in private sector credit and commodity financing operations. This trend, alongside a sharp deceleration in reserve money growth and a declining currency-to-deposit ratio, supports the inflation outlook.

Regarding inflation, headline inflation witnessed a significant year-on-year decline from 28.3 percent in January to 23.1 percent in February, reflecting decreased food and core inflation. However, adjustments in administered energy prices continue to impact inflation directly and indirectly. Any further adjustments in administered prices or fiscal measures may pose risks to the inflation outlook. Consequently, the Committee deemed it prudent to maintain the current monetary policy stance at this juncture.

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