Monetary Policy Pakistan: SBP Keeps Rate Unchanged
The SBP's monetary policy decision is a key factor in shaping Pakistan's economic outlook, and the bank's cautious approach is expected to have a positive impact on the country's macroeconomic stability. However, the potential rise in inflation and the volatility in food and energy prices remain key concerns for the central bank.
The State Bank of Pakistan (SBP) has maintained the policy rate at 12% despite expectations of a rate cut, citing the persistence of core inflation at an elevated level and concerns about the volatility in food and energy prices.
The Monetary Policy Committee (MPC) of the SBP noted that core inflation is currently at 1.5% year-on-year, which is higher than expected, and that the current account deficit has emerged due to rising imports and weak financial inflows. The MPC expressed concerns about the external account, which turned into a deficit of $0.4 billion in January, and the potential impact of rising food and energy prices on inflation.
The SBP had reduced the policy rate by 1,000 basis points since last year, and the current rate is a near-decade low of 1.5 percent. Despite the decline, the MPC believes that the current real interest rate is adequately positive to sustain macroeconomic stability. The committee expects economic activity to gain further traction, but has expressed concerns about the external account and the potential rise in inflation.
Most analysts expect the central bank to cut rates further, with a median forecast of a 50 basis points cut, but believe the central bank will stop when rates hit 10.5-11 percent due to potential rise in inflation. The MPC has maintained its earlier real GDP growth projection of 2.5-3.5 percent, and expects economic growth to recover in the second half of FY25.
The SBP's decision to keep the policy rate unchanged is seen as a cautious stance, as the central bank aims to maintain a stable monetary policy to achieve sustainable economic growth. The decision is also seen as a response to the challenges posed by the current economic situation, including the persistence of core inflation and the volatility in food and energy prices.
