• Central bank revises upwards targets for inflation, current account deficit
• Notes recent rise in govt auction yields appears unwarranted
• SBP governor insists there won’t be 13pc rate-like situation in future

KARACHI: The State Bank of Pakistan (SBP) on Tuesday increased the policy interest rate by 100 basis points to 9.75 per cent and revised targets for inflation, current account deficit and growth rate and changed perception about the rising import bill.

While announcing the decision, the SBP explained that the policy rate was raised “to counter the inflationary pressure and ensure that growth remains stable”. “The MPC (Monetary Policy Committee) expects monetary policy settings to remain broadly unchanged in the near term,” the SBP said, adding that the end goal of mildly positive real interest rate on a forward-looking basis was now close to being achieved.

Meanwhile, in an interview with Geo News, SBP Governor Dr Reza Baqir assured that there would be no 13pc interest rate-like situation in future because this time “we have been taking timely corrective measures”. Earlier, he added, the interest rate had risen to over 13pc due to a crisis as the current account deficit was more than $19 billion in the year 2018.

The SBP said that since the last MPC meeting despite a moderation in consumer loans, the overall credit growth has remained supportive of growth. Meanwhile, across all tenors secondary market yields benchmark rates and cut-off rates in the government’s auctions have risen significantly. The MPC noted that this increase appeared unwarranted.

The SBP said the momentum in inflation had continued since the last meeting, as reflected in a significant increase in both headline and core inflation in November. “Due to recent higher than expected outturns, SBP expects inflation to average 9-11 per cent this fiscal year,” it said, adding that the pickup in inflation had been broad-based, with electricity charges, motor fuel, house rent, milk and vegetable ghee among the largest contributors.

The State Bank also changed its assessment for current account deficit as the target for the current fiscal year (FY22) is in the range of 2-3pc of GDP. “Due to the higher recent outturns, the current account deficit is projected at around 4pc of GDP, somewhat higher than earlier projected,” it said.

While in the near term monthly current account and trade deficit figures are likely to remain high, they are expected to gradually moderate in the second half of FY22 as global prices normalise with the easing of supply disruptions and tightening of monetary policy by major central banks, it added.

The SBP looks satisfied with the recent data releases which confirmed that the emphasis of monetary policy on moderating inflation and the current account deficit remained appropriate.

“The current account deficit is expected to be fully financed from external inflows,” said the SBP, adding that as a result foreign exchange reserves should remain at adequate levels through the rest of the fiscal year and resume their growth trajectory as global commodity prices ease and import demand moderates.

Since the last MPC meeting on Nov 19, indicators of activity have remained robust while inflation and trade deficit have risen further due to both high global prices and domestic economic growth, it said.

In November, headline inflation increased to 11.5 per cent year-on-year. Core inflation in urban and rural areas also rose to 7.6pc and 8.2pc, respectively, reflecting domestic demand growth. On the external side, despite record exports, high global commodity prices contributed to a significant increase in the import bill, the SBP said.

“As a result, November trade deficit rose to $5 billion. The growth this fiscal year is expected to be close to the upper end of the forecast range of 4-5pc,” it added.

High-frequency indicators of domestic demand released since the last MPC meeting, including electricity generation, cement dispatches, and sales of fast-moving consumer goods and petroleum products, and continued strength in imports and tax revenues suggest that economic growth remains robust.

“A robust growth in sales tax on services also suggests that the sector is recovering well,” said the SBP, adding that this projection factored in the expected impact of Tuesday’s interest rate decision. “Around 70 per cent of this increase in imports stems from a sharp rise in global commodity prices, while the rest is attributable to stronger domestic demand,” it added.

Despite strong exports and remittances, the current account deficit has increased sharply this year due to a rise in imports while recent outturns have been higher than earlier expected. Based on this momentum and the expected path of energy tariffs, inflation is likely to remain within the revised forecast range for the remainder of the fiscal year, said the SBP.

Subsequently, as global commodity prices retrench, administered price increases dissipate and the impact of demand-moderating policies materialises, inflation is expected to decline towards the medium-term target range of 5-7pc during FY23, it added.

The SBP said the government intended to introduce legislation to increase revenues through elimination of certain tax exemptions and reduce current and development expenditures. These measures would help moderate domestic demand, improve the current account outlook and complement recent monetary policy actions, it added.

Published in Dawn, December 15th, 2021