Economy – Monetary Policy Announcement
MPC Briefing Notes
State Bank of Pakistan held the Monetary Policy Committee (MPC) meeting today, wherein the MPC increased the policy rate by 100bps to 21%.
● The MPC noted that Inflation in March 2023 rose to 35.4% and is expected to stay high in the near future. Inflation expectations are plateauing, but at a high level. Today’s decision is important for anchoring inflation expectations and achieving price stability.
● The SBP has revised its Current Account deficit target to below USD6bn for FY23 compared to its initial projection of USD10bn.
● The committee highlighted that the debt servicing for the last quarter of FY23 is amounted to USD4.5bn, of which USD2.3bn will be rollovered during the said period.
● Furthermore, the MPS also highlighted three significant developments since the last meeting that includes: the current account deficit has decreased due to import containment, progress in completing the 9th review of the IMF’s EFF program, and challenges in accessing international capital markets due to global banking system strains.
● The MPC acknowledged a broad-based economic slowdown, as indicated by declining sales volumes of automobiles and POL in recent months, and a contraction in LSM output. These trends, combined with recent monetary tightening and fiscal consolidation measures, suggest a significant decrease in growth for FY23 compared to the post-floods assessment of November 2022.
● The MPC observed a decline in the current account deficit in February 2023, with a cumulative deficit of USD3.9bn for Jul-Feb FY23, a significant drop of 68% YoY amid import restrictions. Albeit, there has been a slight recovery in workers’ remittances in February, higher loan repayments relative to disbursements continue to strain foreign exchange reserves. In light of this, the Committee reiterated the crucial role of concluding the 9th review under the IMF program early, to fill FX reserve buffers.
● Going-Forward, the MPC noted that today’s decision along with previous accumulated monetary tightening pushed the real interest rate in positive territory on a forward-looking basis, until and unless the unexpected political and economic shocks happen. This will help anchor inflation expectations and steer inflation to the medium-term target of 5-7% by the end of FY25.
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