The State Bank of Pakistan (SBP) kept its benchmark interest rate at 9.75% on Monday, signaling a pause in the tightening cycle.
“There is no need for further tightening at the moment due to government fiscal policy,” SBP Governor Reza Baqir said Monday at a press conference.
In line with the Monetary Policy Statement (MPS), the decision to keep the policy rate constant is consistent with the forward guidance provided in previous statements. “At today’s meeting, the Monetary Policy Committee (MPC) decided to maintain the policy rate at 9.75%, in line with the forward guidance provided in the latest monetary policy statement,” the MPS said. .
Previously, the SBP had significantly raised the policy rate by 275 basis points, increased the required liquidity reserves, further reduced the excess money supply by tightening consumer credit and reducing non-essential imports.
According to the SBP, the conditions that warranted a rate hike no longer persisted in the same way.
In addition, it is important to note that the State Bank made two 63-day reverse repo purchases to inject liquidity. The maturity date of the second 63-day OMO is February 25, 2022. 19 quotations were offered between 10 and 9.5%.
This OMO meant that the key rate would remain unchanged, because the OMO meant that the SBP was ready to accept a fixed return for 2 months.
In response to a question from profit Regarding the injection of OMO, Baqir replied that the SBP, according to the SBP law, although it is not able to lend directly to the government, can step in and inject liquidity when needed. The decision to intervene was taken bearing in mind the gap between the returns demanded by the banks and the policy rate.
Analysts expect another injection of longer OMO if the market does not take the forecast seriously.
Real interest rates and growth
“While headline year-over-year inflation is elevated and likely to remain so in the near term due to base effects and energy prices, inflation momentum has slowed with monthly inflation stable in December compared to a significant increase of 3% in November. Business inflation expectations have also fallen significantly,” the statement said.
Bearing in mind the improving inflation outlook (not the current inflationary environment), the MPC believes that real interest rates are appropriate given that medium-term inflation expectations are between 5 and 7%.
“However, in FY23, inflation is expected to decline towards the medium-term target range of 5-7% faster than expected, as demand-side pressures decline faster due to the law of finance (additional) and the recent moderation in economic activity indicators,” the statement said.
Many analysts and industry representatives point out that there is no point in increasing the discount rate to deal with cost inflation. This is usually done to eliminate excess liquidity and control the money supply, which helps to lower demand and pull inflation.
Previously, the SBP believed that increasing the money supply was inflationary. Additionally, the MPC projected 4-5% GDP growth in FY22, which is lower than previous expectations.
This keeping in mind the moderation of demand.
Current account deficit
In the first half of FY22, the current account deficit reached $9 billion. According to PBS data, imports reached $40.6 billion. This is 66% more than last year, mainly due to energy imports and covid vaccines which bear half the weight of the increase.
“The current account deficit appears to have stopped growing since November and the non-oil current account balance is expected to post a small surplus for FY22.”
While this shows that rising fuel prices are driving the deficit, it is important to note that when discussing CAD and the impact of CAD, fuel cannot be discounted.
“The current account projection is subject to risks on both sides. On the one hand, the deficit could be larger if global commodity prices take longer to normalize. On the other hand, it could be less if the budgetary consolidation associated with the finance law has a faster and more pronounced impact on demand.
What awaits us?
“The MPC will continue to closely monitor developments affecting the medium-term outlook for inflation, financial stability and growth,” the MPS said.
“If future data outcomes require an adjustment to monetary policy settings, the MPC expects any changes to be relatively modest.”
Analysts expect the SBP to proceed with another 63-day OMO to signal a pause in rate hikes similar to OMOs made in the past.
However, according to the market consensus, the tightening cycle is not over, it is only a pause.