Mohsin Siddiqui (Chief Reporter)
The government has communicated to the International Monetary Fund (IMF) that the policy rate has been elevated to 22 percent. The administration asserts its preparedness to act decisively should near-term price pressures resurface, be it due to stronger-than-expected second-round effects on core inflation or renewed pressures on the exchange rate amid the normalization in the current account. This information is extracted from the IMF report titled “First Review under the Stand-By Arrangement.”
Amidst indications of weakening demand, positive supply developments, and decreasing pressures from the exchange rate, the government anticipates a notable decline in inflation over the next few months. Consequently, the policy rate was maintained at 22 percent during the latest Monetary Policy Committee (MPC) meeting on October 30. However, the government reiterates its commitment to respond resolutely if near-term price pressures re-emerge.
The overarching goal is to ensure a clear downward trajectory for inflation and inflation expectations. Adjustments to the policy rate will be contingent on various factors such as inflation data, exchange rate movements, external position strength, and the fiscal-monetary policy mix. The government aims to maintain a real policy rate in positive territory, signaling its commitment to bring inflation within the target band by fiscal year 2026. Additionally, the interest rate on major refinancing schemes (EFS and LTFF) will continue to be linked to the policy rate with a spread of no more than 3 percentage points for enhanced monetary policy transmission, according to Pakistani authorities.
The report emphasizes that despite the forward-looking real policy rate returning to positive territory, caution is essential due to near-term risks. The Monetary Policy Committee is urged to respond promptly if inflationary pressures resurface, ensuring a clear positive territory for the real policy rate. This approach, coupled with vigilance against new demand pressures or rising inflation expectations, aims to re-anchor inflation expectations and reduce core inflation from FY24H2 onwards.
Headline inflation is anticipated to decline significantly through FY25-26, aligning with the 5–7 percent target range within FY26. This projection is supported by fiscal consolidation measures and the normalization of global commodity prices.
While acknowledging the appropriateness of the current stance given weak domestic demand, the report underscores the importance for the Monetary Policy Committee to be prepared to act decisively in the face of potential near-term price pressures. This readiness includes efforts to improve monetary transmission, gradually phasing out the State Bank of Pakistan’s involvement in refinancing schemes, and enhancing internal control systems around monetary policy lending operations, as recommended by the 2023 Safeguards Assessment Report.
