Status Quo maintained

Dear Clients,

– In its Monetary Policy meeting scheduled earlier today, the State Bank of Pakistan (SBP) followed through with its guidance and opted for a status quo, keeping interest rates unchanged at 7.0%. While the SBP remained wary of recent inflationary trends resulting from high food prices and energy tariff hikes, it largely established its status quo decision on the potential uncertainty regarding economic growth.

Key highlights of the Monetary Policy Statement (MPS)

– The SBP highlighted that economic recovery continues to gather pace, compelling the SBP to further enhance its GDP growth forecast to around 3.0% in FY21 (previous: slightly above 2.0%). The SBP credits the expedited economic recovery to the timely Monetary and Fiscal stimulus provided to the economy. The central bank, however, highlighted that the recent, more virulent 3rd wave of the COVID-19 poses significant risk to the economy’s growth forecasts.

– As mentioned, the SBP took note of the rising inflationary trend led by food supply constraints and electricity tariff hikes. It believes the tariff hike will continue pushing inflation while global economic recovery will continue escalating commodity prices, particularly oil and food. Consequently, the SBP believes that average CPI will likely fall around the upper end of its forecasted range (7.0-9.0%).

– The central bank, however, pointed out that its medium term inflation forecast remains anchored at 5.0%-7.0%, suggesting recent inflationary trends will subside as supply-side factors are actively addressed. Moreover, the SBP highlighted the existence of a potential negative output gap within the economy, further reinforcing its medium term inflation projections.

– The SBP pointed out the improved external account balance during FY21, citing the USD 0.9bn current account balance. The central bank, however, believe that external accounts are likely to come under pressure in the coming months as the economy recovers and the import of capital goods increase. Nevertheless, it believes that the CAD will remain below 1% of GDP during FY21.

– The SBP noted that improving external accounts in tandem with the resumption of the IMF program has enabled Pakistan to comfortably fulfill its external financing need. The central bank highlighted that these developments has allowed its reserves to reach 3yr high levels of USD 13.0bn and enabled the Pak Rupee to appreciate by 3.4%.

– The central bank also took note of the considerable increase in corporate and consumer financing over the previous year, crediting the increase to lower interest rates and financing schemes introduced by the SBP, particularly the TERF and LTFF financing.

Monetary Outlook

– The potential threat to the economy’s GDP resulting from the 3rd wave of the virus compelled the SBP to keep its monetary stance accommodative. It also reiterated that once economic recovery becomes sustainable and the economy’s output reaches near peak capacity, any ‘policy adjustments will be gradual to achieve mildly positive real interest rates.’

Regards,
KASB Research

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