In line with the wider market consensus, the Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) kept the key policy rate unchanged at 22% on Monday. “At its meeting today, the MPC decided to maintain the policy rate at 22 percent,” it said in a press release. “The Committee noted that headline inflation rose in September 2023 as expected. However, it is projected to decline in October and then maintain a downward trajectory, especially in the second half of the fiscal year.” The MPC acknowledged that the recent volatility in global oil prices as well as the increase in gas tariffs from November 2023 pose some risks to the FY24 outlook for inflation and the current account, but said that it also noted some offsetting factors. “These include the targeted fiscal consolidation in Q1; improvement in market availability of key commodities; and the alignment of interbank and open market exchange rates.” Real policy rate is significantly positive on 12-month forward-looking basis and is appropriate to bring inflation down to the medium-term target of 5 – 7 percent by end-FY25. However, the MPC noted that this outlook is based on continued fiscal consolidation and timely realisation of planned external inflows: MPC statement The MPC noted the following key developments since its September meeting. “First, the initial estimates for Kharif crops are encouraging and will have positive effects on other key sectors of the economy. “Second, the current account deficit narrowed considerably in August and September, which helped to stabilise the SBP’s FX reserves position amidst tepid external financing in these two months. “Third, fiscal consolidation remained on track, with both fiscal and primary balances improving during Q1-FY24. “Fourth, while core inflation remains sticky, inflation expectations of both consumers and businesses improved in the latest pulse surveys. However, global oil prices remain quite volatile and the conflict in the Middle East makes its outlook even more uncertain.” It added that in the light of these developments, the MPC emphasised on continuing with the tight monetary policy stance. “The MPC reiterated its earlier view that the real policy rate is significantly positive on 12-month forward-looking basis and is appropriate to bring inflation down to the medium-term target of 5 – 7 percent by end-FY25. However, the MPC noted that this outlook is based on continued fiscal consolidation and timely realisation of planned external inflows.” Background Since the last MPC on September 14 , when the MPC also kept the policy rate unchanged at 22% , a number of key developments on the economic front had taken place. The rupee appreciated over 6% , while petrol prices decreased around 14% as well. The Consumer Price Index (CPI)-based inflation clocked in at 31.4% on a year-on-year basis in September 2023, as compared to an increase of 27.4 % in the previous month and 23.2% in September 2022, according to the Pakistan Bureau of Statistics (PBS). In addition, Pakistan’s current account posted a deficit of $8 million in September 2023 as compared to the current account deficit of $360 million in the same month in 2022, on account of a slight increase in exports and decline in imports. Foreign exchange reserves held by the central bank also declined and are currently at the $7.5 billion level. What did analysts say? Earlier, market experts Business Recorder reached out to said they expected the central bank to hold the rate in the upcoming meeting . “We expect the SBP to hold the policy rate at 22% in this meeting,” said Arif Habib Limited (AHL), in a recent report. “We also expect headline inflation to continue its downward trajectory in the upcoming months,” said the brokerage house, adding that the average MoM rate projected to be 1.03% until June 2024. “These expectations are based on several factors, including reduced demand-side pressures, the stabilisation of global commodity prices, and the influence of a high base effect. This stands in contrast to the FY23, where the average headline inflation rate was higher at 29.2%,” said AHL. It is pertinent to mention that as part of the IMF agreement, the government has committed to the Washington-based lender that it stands ready to consider further action in upcoming MPC meetings until inflation expectations are on a clear downward path. However, despite securing a last-minute deal with the IMF , which initially provided massive relief to policymakers as well as the currency and stock markets, the economy remains engulfed with rising inflation and dwindling reserves.