By Staff Reporter
KARACHI: Pakistan’s central bank kept its benchmark interest rate unchanged at 22 percent on Monday, saying it expected inflation to ease in the coming months and economic activity to improve with the support of the International Monetary Fund (IMF).
The decision to hold the main policy rate steady comes ahead of a visit by an IMF delegation on Thursday that will review progress on targets set in a $3 billion programme approved in July to bail out the struggling economy.
The Monetary Policy Committee (MPC) said in a statement that it projected headline inflation to decline in October and then maintain a downward trajectory, especially in the second half of the fiscal year ending June 2024.
The decision was in line with the median estimate of 12 economists surveyed by IP, who expected no change in the policy rate. The bank has kept rates unchanged since July following a series of hikes since April 2022, totaling 12.25 percentage points.
“The MPC emphasized continuing with the tight monetary policy stance,” the State Bank of Pakistan (SBP) said. The central bank added it expected inflation to decline in October and keep falling “significantly” in the coming months due to easing prices of major food commodities and a drop in fuel prices.
However, the bank warned that the outlook for global oil prices had become more uncertain in light of the instability in the Middle East following the outbreak of the Israel-Hamas war.
The central bank had forecast inflation to ease this financial year – which began on July 1 – to average around 20 percent to 22 percent, from 29.2 percent in the previous financial year.
Inflation spiked to 31.4 percent in September on the back of a record fuel price hike, but the government has since slashed prices at the pump.
Inflation figures for October are due later this week.
The central bank said that it will continue to monitor the economic situation and take appropriate measures as needed to achieve its objectives of price stability and sustainable growth.
The IMF forecasts inflation at 25.9 percent this year and has advocated mildly positive real interest rates. Central bank chief Jameel Ahmad has said that did not mean a recommendation for further rate hikes, but rather that monetary policy should remain tight.
Ahmad has also said that Pakistan’s central bank had met key targets set by the IMF ahead of the visit.
The bank said that a “successful and timely completion of the upcoming IMF-SBA review would help unlock other multilateral and bilateral financing.”
The SBP also noted the improvement in the current account balance, which narrowed by more than half in the first quarter, and the stabilization of the foreign exchange market.
The MPC said 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 5-7 percent by the end of FY25. However, it also stressed the need for continued fiscal consolidation and timely realization of planned external inflows.
The central bank noted some positive developments in the real sector, such as the encouraging estimates for major Kharif crops, which will have positive effects on other key sectors of the economy. It also said that large-scale manufacturing output has indicated a gradual improvement in the first two months of this year, with a major contribution coming from domestic-oriented sectors.
Mohammad Sohail, chief executive of Karachi-based brokerage firm Topline Securities, said that Monday’s decision was in line with what recent data had suggested.
“Going forward lot will depend on PKR (Pakistani rupee) stability and global oil prices along with IMF loan review,” he added.
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