The SBP said inflation will remain in the range of 18-20% this fiscal year before declining sharply during FY2023-24

The State Bank of Pakistan (SBP) said Thursday inflation will remain in the range of 18-20 percent this fiscal year before declining sharply during FY2023-24.

The central bank hiked its benchmark interest rate to the highest level since 2008 on Thursday, raising the borrowing cost by 125 basis points (bps) to 15 percent to fight multi-year high inflation.

Beating market expectation of 100 bps, the SBP’s Monetary Policy Committee delivered a sharp increase in policy rate after inflation surged to a 14-year high of 21.3 percent in June as the government removed energy subsidies.

The rates have been increased by 525 bps so far this year. Since September 2021, the central bank has raised rates by 800 bps. “This combined action continues the monetary tightening underway since last September, which is aimed at ensuring a soft landing of the economy amid an exceptionally challenging and uncertain global environment,” the SBP said in a statement. “It should help cool economic activity, prevent a de-anchoring of inflation expectations and provide support to rupee in the wake of multi-year high inflation and record imports,” it added.

This baseline outlook is subject to significant uncertainty, with risks arising from the path of global commodity prices, the domestic fiscal policy stance, and the exchange rate. The central bank took strong, timely, and credible policy action to tackle the challenges the country is facing, the acting SBP governor Murtaza Syed said at his post-meeting news conference.

Had the central bank not implemented its monetary tightening policies, inflationary pressures and problems with the external current account may have worsened, Syed said. He added the SBP also emphasised the necessity for targeted subsidies in situations when well-off members of society must bear the burden of rising inflationary pressures and utility pricing impacts.

The SBP expects the gross domestic growth rate to be 3-4 percent in FY2023 due to monetary tightening and fiscal consolidation that would help close the positive output gap and diminish demand-side pressures on inflation, Syed said, adding this would pave the way for higher growth on a more sustainable basis.

“The actual potential of the country’s economic growth is 4-5 percent but the higher growth achieved in the last two years was due to fiscal and monetary stimulus,” Syed said. About a declining trend in the global commodity prices, the acting governor said, it would benefit Pakistan’s inflation and current account deficit. If the fall in the global oil and other commodity prices sustains, it would be considered in the next monetary policy.

Going forward, the SBP will be closely monitoring month-on-month numbers and trying to keep second-round effects of inflation contained, he said. The SBP expects that the current account deficit FY2023 can narrow to 3 percent of GDP with additional measures like early closure of markets, reduced electricity used by residential and commercial customers and greater adoption of work from home.

In the IMF talks, Syed said, the hard part has been done — passing of the budget as well as fiscal adjustments (including energy subsidies reversal). With this, the SBP expects a staff-level agreement to be concluded soon.

The expected completion of the ongoing IMF review will help unlock important additional funding from external sources that will ensure that Pakistan’s external financing needs during FY2023 are met, Syed said.

Pressures on the rupee should then attenuate and SBP’s foreign exchange reserves should gradually resume their previous upward trajectory during FY2023, he added.