KARACHI: The State Bank of Pakistan (SBP) kept the key interest rate unchanged at 22 per cent on Monday, expecting inflation to decline significantly in October because of downward adjustments in fuel prices, easing rates of some major food commodities and a favourable base effect.

The Monetary Policy Committee (MPC) of the SBP noted that headline inflation rose in September as expected.

The SBP in its previous monetary policy announcement in September also kept the rate unchanged, which surprised the financial sector since the cut-off yields on treasury bills had increased by up to 200 basis points. This time, the cut in the fuel prices of up to Rs40 per litre was a key consideration for the expected no change or a slight increase in the interest rate.

“It is projected to decline in October and then maintain a downward trajectory, especially in the second half of the fiscal year,” said the SBP, adding that the recent volatility in global oil prices as well as the increase in gas tariffs from November pose some risks to the 2023-24 outlook for inflation and the current account.

Expects inflation to decelerate ‘substantially’ in second half, barring ‘major adverse developments’

The SBP said the offsetting factors include the targeted fiscal consolidation in the first quarter, improvement in the market availability of key commodities, and the alignment of interbank and open market exchange rates.

The committee also noted some key developments that have taken place since its September meeting. First, the initial estimates for Kharif crops are encouraging and will have positive effects on other key sectors of the economy. Second, the current account deficit narrowed considerably in August and September, which helped stabilise the SBP’s foreign exchange reserves position amidst tepid external financing in these two months.

Third, fiscal consolidation remained on track, with both fiscal and primary balances improving during the first quarter of FY24. Fourth, while core inflation remains sticky, inflation expectations of both consumers and businesses improved in the latest pulse surveys.

“However, global oil prices remain quite volatile and the conflict in the Middle East makes its outlook even more uncertain,” said the SBP.

The SBP emphasised continuing with the tight monetary policy stance. It reiterated its earlier view that the real policy rate is significantly positive on a 12-month forward-looking basis and is appropriate to bring inflation down to the medium-term target of 5-7pc by the end of 2024-25.

However, the committee noted that this outlook is based on continued fiscal consolidation and timely realisation of planned external inflows.

Improved cr­op output

The latest production estimates of major kharif crops show a considerable increase compared to last year. These improved cr­op output estimates are supported by hig­her fertiliser off-take and better availability of water. Moreover, the large-scale man­ufacturing (LSM) output has indicated a gradual improvement in the first two mon­ths of this year, with major contributions coming from domestic-oriented sectors.

External sector

The committee noted a substantial impr­o­vement in the current account balance as the deficit narrowed over 58pc year-on-year to $947 million in July-September while almost levelling out in September.

Both exports and workers’ remittances improved in September over the preceding two months. The reforms related to exchange companies introduced in early September, coupled with administrative actions against illicit market activities, also helped improve foreign exchange market sentiments and liquidity.

Fiscal indicators

In the first quarter of FY24, fiscal indicators improved compared to the first quarter of the last fiscal year. Specifically, the fiscal deficit improved to 0.9pc of GDP from 1pc and the primary balance posted a surplus of 0.4pc compared with 0.2pc last year. This improvement reflects both better revenue collection and restrained spending. The collection by the Federal Board of Revenue recorded 24.9pc growth over the same period last year.

Inflation outlook

As anticipated, headline inflation surged to 31.4pc year-on-year in September. The committee also reaffirmed its earlier assessment that inflation will decelerate substantially from the second half of FY24, barring any major adverse developments.

“The recent uptick and volatile trend in global oil prices, as well as the second-round effects of a substantial increase in gas tariffs, pose some upside risk to the inflation outlook,” said the SBP, adding that core inflation is also persisting at elevated levels.

Published in Dawn, October 31st, 2023