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Wednesday, May 22, 2024

SBP Set to Deliberate Key Policy Rate Amidst Mixed Expectations

SBP to convene MPC meeting on April 29, 2024, amidst expectations and risks, including inflation trends, FX reserves, and geopolitical tensions, with analysts split on potential interest rate adjustments.

The State Bank of Pakistan (SBP) is gearing up for its next monetary policy committee (MPC) meeting scheduled for April 29, 2024, aimed at determining the crucial key policy rate. During the previous meeting on March 18, 2024, the MPC opted to maintain the policy rate at 22 percent.

The decision stemmed from the committee’s observation that although there was a notable deceleration in inflation in February, the inflation level remained high, with susceptibility to risks amid elevated inflation expectations.

Looking ahead, analysts and economists hold varying perspectives on the upcoming monetary policy adjustments. A survey conducted by Topline revealed that 51 percent of respondents anticipate the policy rate to remain unchanged, while the remaining 49 percent foresee a potential policy rate cut, with no expectations of a rate hike.

Experts suggest that since the last MPC gathering, several new developments have emerged, likely to influence the forthcoming meeting’s deliberations. These include a reduction in CPI inflation from 23.1 percent in February 2024 to 20.7 percent in March 2024. Moreover, SBP FX Reserves reach $8 billion despite the repayment of a $1 billion Eurobond and Pakistan attains a Current Account Surplus of $128 million in February 2024, contrasting with a deficit of $303 million in January 2024.

There is also a slight increase in international oil prices along with a 3 percent rise in local fuel prices. Additionally, the rupee has largely maintained stability against the US dollar, alongside escalating tensions between Iran and Israel. Moreover, the recent Treasury Bill (T-Bill) auction held on April 17 witnessed mixed participation in 3-month and 12-month bonds, with the cut-off yield remaining steady at 21.66 percent and 20.89 percent, respectively.

Analysts at Topline project that the SBP will likely maintain a cautious stance despite the favorable trends, adopting a “watch and see” approach until a sustained downward trajectory in inflation is observed.

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They highlight key risks to the inflation trajectory, including potential increases in international prices, delays in the release of IMF funds, IMF demands for additional tax measures to meet revenue targets in case of shortfalls, and pressure on the dollar against the rupee primarily due to delays in receiving dollar inflows.