EA Report
Karachi: Sep. 20 — The Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) has increased the key interest rate by 25 basis points following alarming yet highly anticipated levels of Current Account (CAD)
Policymakers seek to find a balance between Pakistan’s economic growth and its bulging trade deficit while taming inflationary pressures.
SBP previously increased the interest rate in July 2019, when it took it to the maximum level of 13.25%. and gradually reduced the key rate, eventually bringing it to 7% in June 2020 and maintaining it in the next six monetary policy announcements.
The interest rate now stands at 7.25%.
Earlier, some market participants said they expected the central bank to maintain the key interest rate at 7%, but a greater divide was visible with some seeing a hike of 25 basis points.
Back in 2020, the MPC noted that the priority of monetary policy shifted toward supporting growth and employment amid a slowdown in the domestic economy.
However, the expectation of an interest-rate hike gathered some momentum in recent weeks with rupee depreciation and a widening current account deficit influencing expectations of the path SBP would take in the coming months.
Pakistan’s current account deficit (CAD) increased to $1.48 billion in August 21, a massive 81% month-on-month increase from $0.814 billion, showed data on Friday.
SBP reported a CAD of US$1.48bn for Aug-2021, almost double compared to Jul-2021 print. During Aug-2020 last year, low trade gap had yielded a CA surplus of US$255mn. An increased trade gap of US$3.67bn, as imports rose faster than exports in face of steady pace of remittance flows, has ballooned the CA deficit. Cumulatively, CA for 2MFY22 now stands at a deficit of US$2.29bn against a surplus of US$838mn last year.
In addition, SBP’s monetary easing, pandemic stimuli (TERF) and commodity super cycle have all triggered a steep rise in imports. A dissection of Pakistan’s imports during 2MFY22 reveals a 45% jump in food, 19% in machinery, 165% in transport, 87% in petroleum.
After hike, experts recommend investors to accumulate positions in the Fertilizers, Banks, Autos, and Cement sector as these sectors are likely to perform as market activity improves.
The SBP, in its statement issued on Monday, said that since its last meeting in July, the MPC noted that the pace of the economic recovery has exceeded expectations.
At this more mature stage of the recovery, a greater emphasis is needed on ensuring the appropriate policy mix to protect the longevity of growth, keep inflation expectations anchored, and slow the growth in the current account deficit: MPC statement
“This robust recovery in domestic demand, coupled with higher international commodity prices, is leading to a strong pick-up in imports and a rise in the current account deficit.
“While year-on-year inflation has declined since June, rising demand pressures together with higher imported inflation could begin to manifest in inflation readings later in the fiscal year.
“With growing signs that the latest Covid wave in Pakistan remains contained, continued progress in vaccination, and overall deft management of the pandemic by the government, the economic recovery now appears less vulnerable to pandemic-related uncertainty.
“As a result, at this more mature stage of the recovery, a greater emphasis is needed on ensuring the appropriate policy mix to protect the longevity of growth, keep inflation expectations anchored, and slow the growth in the current account deficit.”
The MPC was of the view that the priority of monetary policy also needed to gradually pivot from catalysing the recovery after the Covid shock toward sustaining it.
“As foreshadowed in pre…
Pakistan Rupee Exchange Rate