Pakistan holds key rate for first time in almost a year

Pakistan unexpectedly held its benchmark rate for the first time in almost a year, with policymakers flagging risks to inflation from global trade disruptions and volatile food prices.

The State Bank of Pakistan left the target rate at 12 per cent, the central bank said in a statement. Only seven out of the 35 analysts surveyed by Bloomberg predicted the move, with the rest forecasting a cut. 

“The Committee noted that the impact of sizable earlier reduction in policy rate is now materializing,” the central bank said, adding that a cautious monetary policy stance was needed to stabilize inflation within the target range of 5-7 per cent. 

The monetary authority sees risks to the outlook from volatile commodity prices and trade disruptions. The finance ministry also anticipates inflation to climb in March as food prices surge in the holy month of Ramadan.

“Core inflation is still at an elevated level and is proving stickier than anticipated,” the central bank said.” Inflation expectations of consumers and businesses are also showing a mixed picture, it said. 

Pakistan’s inflation rate has dropped to single digits in the last few months after hitting an all-time high of 38 per cent in May 2023. That has provided room to policymakers to trim the benchmark rates, with the central bank easing policy rates significantly since June last year.

According to Bloomberg economist Ankur Shulka, "The State Bank of Pakistan’s decision to keep rates on hold on Monday is a correct one, in our view. It opted to monitor the impact of the hefty easing done so far. As the previous rate cuts have started transmitting into the real economy, imports jumped in December and January."

He added, "Any further easing could boost imports sharply, pressure the balance of payments and hurt the rupee — suggesting the SBP’s decision to hold is appropriate."

The International Monetary Fund is assessing the nation’s performance under the ongoing $7 billion Extended Fund Facility. Pakistan is likely to pass the first review of its loan program since it has made enough progress to raise revenue, Bloomberg News reported earlier this month.

The central bank expects economic growth to recover in second half of the current fiscal year due to easing financial conditions. The rate panel maintains its earlier real GDP growth projection of 2.5 –3.5 per cent for this financial year, and expects economic activity to gain further momentum going forward, it said