KARACHI: The State Bank of Pakistan (SBP) on Thursday surprised the stakeholders of the economy by leaving the key interest rate unchanged at 22 per cent in contrast of the market expectation of a substantial hike.

The central bank’s Monetary Policy Committee (MPC) decided to maintain the same policy rate taking into account the latest inflation outturn reflecting the continuing deceleration from its peak of 38pc in May to 27.4pc in August.

Before the announcement of the policy rate, independent economists, analysts and researchers were sure that interest would be increased by 150 to 200 points. All surveys carried out by research houses failed to understand the inflation pattern which resulted in an unchanged policy rate.

“Inflation is projected to remain on the downward trajectory, especially from the second half of this year,” said the Monetary Policy Statement.

Most observers expected an increase of up to 200 basis points

It said the deceleration in inflation was lower than anticipated largely due to the surge in global oil prices and their pass-through to administered energy prices. Also, as per the latest surveys, near-term inflation expectations of both consumers and businesses have reversed from their earlier declining trend, it said.

The MPC noted the recent regulatory and law-enforcement measures will help address supply constraints in commodities and illegal activity in foreign exchange markets. These developments – along with an improved agriculture outlook and tight monetary policy stance – will help ensure that inflation remains on the downward trajectory, especially from the second half of this year.

“The inflation is likely to increase significantly in September mainly due to the base effect and the adjustment in energy prices. It is expected that inflation will subsequently decline in October and maintain its downward trajectory from thereon,” said the SBP.

The MPC noted four key developments since its July meeting. First, the agriculture outlook has improved. Second, global oil prices have been rising and are now hovering over $90 per barrel. Third, as anticipated, the current account posted a deficit in July after remaining in surplus for the last four months.

Finally, recent administrative and regulatory measures aimed at improving the availability of essential food commodities and curbing illegal activities in the foreign exchange market have begun to yield results.

“This has helped in narrowing the gap between the interbank and open market exchange rates,” it added.

“This is necessary to bring inflation down on a sustainable basis and to achieve the medium-term target of 5-7pc by end-FY25,” said the SBP.

Real sector: The latest available high-frequency indicators depict some improvement in economic activity. There is a moderate pick up in sales of key inputs, like petroleum, fertiliser and cement, along with a slight increase in import volumes. The outlook of the agriculture sector has improved. Earlier concerns related to floods have subsided and cotton arrivals almost doubled from last year.

External sector: The current account balance recorded a deficit of $809 million in July after posting surpluses in the preceding four months. The recent structural reforms related to exchange companies will strengthen their governance structure and improve market functioning, said the SBP, adding that on the balance of payments, the committee expects the current account deficit to remain in the earlier projected range for FY24.

Fiscal sector: In the initial two months of FY24, the FBR’s collection grew 27.2pc over the same period last year. This improvement reflects the impact of both fiscal measures and some recovery in economic activity.

Money and credit: The latest data as of Sept 1 showed that broad money (M2) growth decelerated to 13.6pc on a year-on-year basis from 14.2pc observed at the end of June 2023, primarily driven by a significant slowdown in credit to the private sector.

Published in Dawn, September 15th, 2023