The Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) has opted to maintain the policy rate at 22%, emphasizing the necessity of consistency to steer inflation down to the targeted range of 5-7% by September 2025.
In its latest meeting, the MPC acknowledged a visible decline in inflation from the second half of the fiscal year 2024, aligning with previous expectations. However, despite this descent, inflation remains high, with its trajectory susceptible to risks amidst elevated inflation expectations.
Key indicators prompted the central bank’s committee to uphold the current monetary stance as essential for achieving the inflation target. Factors considered include the need for continued targeted fiscal consolidation and timely realization of planned external inflows.
Addressing recent developments, the MPC noted a moderate pickup in economic activity, chiefly driven by a rebound in agricultural output. Additionally, the external current account balance has shown improvement, aiding in maintaining foreign exchange reserves despite weak financial inflows.
However, concerns linger regarding inflation expectations, both among businesses and consumers. Globally, while commodity prices remain relatively stable, oil prices have surged due to ongoing tensions in the Red Sea region.
On the real sector front, incoming data supports expectations of a modest economic recovery in fiscal year 2024, primarily led by the agriculture sector. Despite challenges, improvements are anticipated in the industrial sector, with gradual recovery expected in services as well.
Regarding the external sector, the current account deficit has narrowed, driven by increased exports and reduced imports, supported by higher food exports and subdued domestic demand. Remittances have also been rising consistently, albeit with a slight decline in financial inflows observed in January.
Fiscal consolidation efforts continue, with improvements seen in primary surplus ratios, albeit offset by increasing interest payments due to high debt levels.
Monetary aggregates indicate a moderation in money supply growth, which bodes well for the inflation outlook. Headline inflation has notably declined year-on-year, attributed to various factors including contractionary monetary policy and better food supplies.
However, the MPC remains cautious, citing risks such as potential adjustments in administered prices or fiscal measures that could push prices up in the near to medium term.
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