The State Bank of Pakistan (SBP) is scheduled to meet on September 20, 2021, to review and announce its policy rate, which has been unchanged since March 2020. This meeting comes at a time when the global economy grapples with the delta variant and the dual challenge of fostering growth while managing inflation. The MPC’s decision is highly anticipated, given the complex economic signals that could lead to increased inflation or potentially hinder growth if not balanced appropriately.
According to a poll by Topline Research, approximately 65% of financial market participants anticipate the maintenance of the current 7% policy rate to support economic growth. After experiencing a contraction last year, Pakistan’s economy has shown a modest recovery with a 4% growth rate. Mustafa Mustansir of Taurus Securities has observed that demand-side pressures in the economy remain weak. Further research by the Policy Research Unit (PRU) of the Federation of Pakistan Chamber of Commerce and Industry (FPCCI) found that 84% of market participants do not foresee a change in the policy rate in the upcoming meeting, suggesting a consensus among researchers and the business community for stability in monetary policy.
However, macroeconomic indicators suggest that Pakistan’s economy is facing challenges. The Pakistan Bureau of Statistics (PBS) has reported a substantial increase in the trade deficit, rising to $7.5 billion in the first two months of the fiscal year 2021-22, which is a 120% increase over the same period last year. Despite government efforts to support trade, including subsidies, exports have only increased by 28%, while imports have surged by 73%, indicating a significant imbalance. The Pakistani rupee has depreciated against the dollar, reaching an all-time low despite the country holding around $20 billion in foreign exchange reserves. The SBP has refrained from intervening in the foreign exchange market, in line with the conditions of the International Monetary Fund (IMF) program that requires the currency to float freely.
Some market participants, nearly 10% according to surveys, expect a slight increase in the policy rate to protect against inflationary pressures. Topline Securities analysts suggest a possible 25 basis point hike to address current account vulnerabilities and control inflation. Conversely, a segment of the business community advocates for a decrease in the policy rate, pointing to a drop in core inflation to 6.3% in August. They argue for a rate reduction to align with regional trends and further stimulate economic activity. The upcoming monetary policy decision by the SBP is therefore poised to be a critical one, balancing the need to manage inflation while supporting economic growth and maintaining stability in the currency market.
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