KARACHI : Sept 14: At its meeting today, the Monetary Policy Committee (MPC) decided to maintain the policy rate at
22 percent. This decision takes into account the latest inflation outturn reflecting the continuing declining
trend in inflation from its peak of 38 percent in May to 27.4 percent in August 2023. Even though global oil
prices have risen recently and are being passed on to consumers through adjustment in administered energy
prices, inflation is projected to remain on the downward trajectory, especially from the second half of this
year. As such, real interest rates continue to remain in positive territory on a forward-looking basis. Moreover,
the expected ease in supply constraints owing to better agriculture output and the recent administrative
measures against speculative activity in the FX and commodity markets would also support the inflation
outlook.
The MPC noted four key developments since its July meeting. First, agriculture outlook has
improved, based on the latest data on cotton arrivals, better input conditions, and satellite data indicating
healthy vegetation of other crops. Second, global oil prices have been rising and are now hovering over
$90/barrel level. Third, as anticipated, the current account posted a deficit in July after remaining in surplus
for the last four months, partly reflecting the impact of the recent ease in import restrictions. Finally, recent
administrative and regulatory measures aimed at improving availability of essential food commodities and
curbing illegal activities in the foreign exchange market have begun to yield results. This has helped in
narrowing the gap between the interbank and open market exchange rates.
The MPC noted that it will continue to monitor the risks to the inflation outlook and, if required, it
will take appropriate action to achieve the objective of price stability. At the same time, the MPC also stressed
on maintaining a prudent fiscal stance to keep aggregate demand in check. This is necessary to bring inflation
down on a sustainable basis and to achieve the medium-term target of 5 – 7 percent by end-FY25.
Real sector
The latest available high-frequency indicators depict some improvement in economic activity. There
is moderate pick up in sales of key inputs, like POL, fertilizer and cement, along with slight increase in import
volumes. At the same time, with better input conditions and latest updates, the MPC noted that the outlook
of the agriculture sector has improved. Earlier concerns related to floods have subsided and cotton arrivals
almost doubled from last year. Moreover, the Committee assessed that domestic demand will also remain
contained due to the unfolding impact of monetary tightening and envisaged fiscal consolidation. These
developments are broadly in line with the MPC’s earlier expectations about moderate growth this year.
External sector
The current account balance recorded a deficit of $809 million in July 2023 after posting surpluses in
the preceding four months. This was largely in line with the earlier full-year current account projection for
FY24, which already took into account the withdrawal of import prioritization guidelines and the resultant
pickup in import volumes. Nonetheless, the MPC views that overall imports are expected to remain in check,
supported by the favorable trend in non-oil commodity prices, moderate domestic demand and improved cotton production. Favorable rice prices and available surplus bode well for the export outlook. Moreover, the recent structural reforms related to exchange companies will strengthen their governance structure and improve market functioning. On balance, the Committee expects the current account deficit to remain in the earlier projected range for FY24
