Monetary Policy Committee (MPC) resulted in a decision to uphold the policy rate at 22 percent. The Committee acknowledged the expected rise in headline inflation in September 2023, although projections indicate a decline in October and a sustained downward trajectory, especially in the latter half of the fiscal year. Despite the uncertainties stemming from recent fluctuations in global oil prices and the upcoming increase in gas tariffs from November 2023, which present risks to inflation and the current account in FY24, the Committee also highlighted countervailing factors. These include targeted fiscal consolidation in Q1, improved market availability of essential commodities, and the alignment of interbank and open market exchange rates.
The MPC outlined significant developments since its September gathering. Encouraging initial estimates for Kharif crops are anticipated to positively impact various sectors of the economy. The current account deficit notably narrowed in August and September, aiding the stabilization of the SBP’s FX reserves despite limited external financing. Fiscal consolidation remained on course in Q1-FY24, with improvements seen in both fiscal and primary balances. Although core inflation persists, there have been improvements in inflation expectations among consumers and businesses in recent pulse surveys. However, the persistently volatile global oil prices and uncertainties arising from conflicts in the Middle East add complexity to the outlook.
Given these circumstances, the MPC emphasized the continuation of a stringent monetary policy stance. The Committee reiterated its stance that the real policy rate, when assessed on a forward-looking 12-month basis, remains significantly positive. This stance is deemed appropriate to steer inflation towards the medium-term target of 5-7 percent by the end of FY25, contingent on sustained fiscal consolidation and the timely realization of planned external inflows.
The recent economic activity data reinforces the MPC’s anticipation of moderate growth for the current year. Notably, increased production estimates for major Kharif crops, supported by higher fertilizer uptake and improved water availability, are promising. Other key indicators such as cement, POL, and auto sales, as well as large-scale manufacturing output, indicate a gradual recovery, particularly in domestic-oriented sectors.
In the external sector, the MPC observed a significant improvement in the current account balance, with a notable narrowing of the deficit. Both exports and workers’ remittances showed improvements in September compared to the preceding months. Reforms concerning exchange companies, coupled with actions against illicit market activities, contributed to enhancing FX market sentiments and liquidity. Despite tepid official inflows during August and September, the stabilization of SBP’s FX reserves around $7.5 billion by October 20 was supported by improved inflows in the interbank market. The timely completion of the upcoming IMF-SBA review was noted as pivotal for unlocking further multilateral and bilateral financing.
In Q1-FY24, fiscal indicators showed improvements compared to the first quarter of the previous fiscal year. The fiscal deficit decreased to 0.9 percent of GDP, while the primary balance displayed a surplus of 0.4 percent, reflecting enhanced revenue collection and controlled spending. Sustained fiscal prudence and meeting targeted fiscal consolidation were emphasized as essential for maintaining a downward trajectory in inflation.
Concerning money and credit, the growth of broad money (M2) decelerated to 12.9 percent by the end of September due to a slowdown in private sector credit and seasonal reductions in commodity operations financing. Similarly, reserve money growth slowed down, primarily due to decreased growth in currency in circulation. The MPC noted the expansion of Net Foreign Assets (NFA) of SBP and the banking system, while Net Domestic Assets (NDA) contracted, indicating an improved composition of M2 and reserve money. It is expected that planned fiscal consolidation and anticipated external inflows will create room for private sector credit and improve the NFA of the banking system.
The recent surge in headline inflation to 31.4 percent y/y in September was as expected. The MPC foresees a significant decline in October owing to adjustments in fuel prices, easing of major food commodity prices, and a favorable base effect. The Committee reaffirmed its earlier assessment of substantial inflation decline from the second half of FY24, barring unforeseen adverse developments. However, the recent volatility in global oil prices and the second-round effects of increased gas tariffs pose potential upside risks to the inflation outlook. Despite persistent elevated levels of core inflation, the Committee acknowledged fiscal policies’ contribution to stabilization efforts, coupled with improved food commodity availability, likely supporting the central bank’s measures to reduce inflation.
