KARACHI: The Monetary Policy Committee of the State Bank of Pakistan increased the policy rate by 300 basis points to 20 percent owing to an inflation outlook that warrants a strong policy response and continuity of ongoing monetary tightening.
The Monetary Policy Committee (MPC) also stressed the need for fiscal consolidation with concerted efforts for improving the external position coupled with energy conservation measures to alleviate pressure on the external account, said a statement issued here.
The committee noted that the national CPI inflation has surged to 31.5 percent on year on year basis while core inflation rose to 17.1 percent in urban and 21.5 percent in rural basket in February 2023.
The MPC observed that most of the near-term risks to the inflation outlook from external and fiscal adjustments highlighted in its January meeting had materialized and are partially reflected in the inflation out-turns for February.
The committee indicated that ‘inflation to rise further in the next few months’ and then it begins to fall at a gradual pace due to impact of recent fiscal adjustments and exchange rate depreciation.
“The average inflation this year is now expected in the range of 27 – 29 percent against the November 2022 projection of 21-23 percent,” the MPC noted and emphasised that anchoring inflation expectations was critical and warranted a strong policy response.
In January 2023, the current Account deficit (CAD) fell to $242 million, the lowest level since March 2021. Cumulatively, the CAD – at $3.8 billion in Jul-Jan FY23- is down 67 percent compared to the same period last year.
The MPC seen vulnerabilities continue to persist despite a substantial reduction in CAD as scheduled debt repayments and a decline in financial inflows amid rising global interest rates and domestic uncertainties would continue to exert pressure on foreign exchange reserves and the exchange rate.
The MPC noted that FX reserves remain low and concerted efforts were needed to improve the external position. In this regard, conclusion of the ongoing 9th review under the IMF’s EFF would help addressing near-term external sector challenges, the committee hoped.
The MPC also stressed on the urgent need for energy conservation measures to alleviate pressure on the external account and meet the import requirements of other sectors.
The committee assessed that recent fiscal measures including an increase in GST and excise duties, reduction in subsidies, adjustments in energy prices, and the austerity drive would help containing fiscal and primary deficits.
The committee reiterated that the envisaged fiscal consolidation was critical for economic stability and would complement the ongoing monetary tightening in bringing down inflation over the medium-term.
The Committee emphasised that any significant fiscal slippages will undermine monetary policy effectiveness in the context of achieving the price stability objective.
The MPC while reviewing impact of further monetary tightening on financial stability and the near-term growth outlook asserted that risks to financial stability remain contained, given that financial institutions are broadly well capitalised while a trade-off would persist on growth.
“Short-term costs of bringing down inflation are lower than the long-term costs of allowing it to become entrenched,” the committee reiterated and noted that recent decision by MPC has pushed the real interest rate in positive territory on a forward-looking basis, barring unexpected future shocks.
It would help anchor inflation expectations and steer inflation to the medium-term target of 5 – 7 percent by end FY25, the MPC maintained.
The Committee also decided to hold its next meeting on April 4, 2023.
