By Staff Reporter
KARACHI: Pakistan’s central bank kept its policy rate unchanged at 22 percent on Monday, saying it expected inflation to ease in the coming months after securing a $3 billion bailout from the International Monetary Fund (IMF).
“Inflation is expected to decline gradually over the next 12 months,” State Bank of Pakistan Governor Jameel Ahmad told a press conference, adding that the inflation outlook for the fiscal year that started on July 1 was between 20 percent and 22 percent, lower than the IMF’s projection of 25.9 percent.
Pakistan’s annual inflation slowed to 29.4 percent in June from a record 38 percent in May, but still remained the highest in Asia.
The SBP has raised its key rate by a cumulative six percentage points since January then year to comply with the IMF’s demand for an aggressive monetary policy stance to rein in inflation.
The SBP’s decision was in line with the median estimate of 20 economists polled by the IMF. Four had expected a 50 basis point hike, while one had forecast a 100 basis point increase.
The IMF approved a $3 billion loan for Pakistan earlier this month, averting a looming debt crisis and boosting investor confidence in the South Asian nation’s assets.
Pakistan’s foreign exchange reserves have almost doubled to $8.19 billion since the IMF deal, while its dollar bonds are poised for a 6 percent advance in July, their fourth consecutive monthly gain. The benchmark share index is among the best performers regionally in July.
The SBP said the prospects of multilateral and bilateral inflows had improved after the IMF agreement, and that the market-determined exchange rate would continue to serve as the first line of defense against external shocks and support reserve build-up.
Ahmad said the IMF had not specified a level for the policy rate, but only asked that it remain “aggressive” and reflect the inflation outlook.
“The IMF did not say anywhere that we have to increase rates,” Ahmad said. “They said the policy stance should be aggressive and we will go forward with an aggressive policy stance.”
He said the SBP was on course to meet its medium-term inflation target of 5-7 percent by the end of fiscal year 2025.
The governor also said the SBP would ensure that the open market and interbank rates for the currency remained close to each other, as required by the IMF. The Pakistani rupee has depreciated by about 20 percent against the dollar since January, adding to inflationary pressures.
The SBP expects the economy to grow by 2-3 percent in the current fiscal year, after contracting by 0.4 percent in the previous year due to the coronavirus pandemic. It also expects the current account deficit to remain manageable at 0.5-1.5 percent of gross domestic product.
The monetary policy committee (MPC) said in a statement that economic uncertainty had decreased since its last meeting in May, while external sector challenges had been largely addressed and investor confidence had improved.
“While some upside risks to the inflation outlook have emerged, the committee also took note of the expected lagged impact of the accumulated monetary tightening so far, budgeted fiscal consolidation, and the tepid growth outlook for FY24,” it said.
The MPC will hold its next meeting in September.
The MPC said economic uncertainty had decreased since the last meeting, while near-term external sector challenges have been largely addressed and investor confidence had improved.
“The MPC will continue to carefully monitor the impact of unfolding domestic and global developments on the inflation outlook, and, if required, recalibrate the monetary policy stance to achieve price stability,” it added.
The central bank raised the key rate by 100 basis points to 22 percent in an off-cycle meeting in June, just weeks after having held rates at a scheduled meeting.
The government said the rates had been increased on the IMF’s demand in the run-up to the approval of the new bailout agreement.
Pakistan had been facing its worst economic crisis that led growth to drop almost to zero and currency to drop a fifth of its value in the past year. Keeping up with the reforms will be key for nation that will vote for a new government later year.
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