SBP Interest Rate Remains at 21%

SBP Interest Rate Remains at 21%

interest rate

SBP maintains 21% interest rate.SBP forecasts inflation to decline from June onwards after peaking at 38% in May 2023.The SBP’s Monetary Policy Committee (MPC) chose not to raise interest rates because it “views inflation to have peaked at 38% in May 2023, and barring any unforeseen developments, expects it to start falling from June onwards”.In April, the MPC raised the benchmark policy rate by 100 basis points to a record 21% to manage inflation.The SBP hiked rates 1,150bps since January 2022.The central bank reported today that “higher inflation outturns for April and May were broadly as anticipated”. It “noted a sequential ease in inflation expectations of both consumers and businesses from their recent peaks”.

committee anticipates

The committee anticipates “domestic demand to remain subdued amid tight monetary stance, domestic uncertainty and continuing stress on external account”.”In this backdrop, and given the declining m/m trend, the MPC views inflation to have peaked at 38% in May 2023, and barring any unforeseen developments, expects it to start falling from June onwards,” the statement added.The SBP stated food price increases “remained broad-based” inflation.”Importantly, core inflation maintained its upward trajectory, albeit at a slower pace, mainly indicating the second-round impact of higher food and energy prices and exchange rate depreciation amid still elevated inflation expectations,” said the SBP. However, the central bank “expects that reduced demand-side pressures and ease in inflation expectations, along with moderating global commodity prices and high base effect, would help bring inflation down from June 2023 onwards”.

policy stance

“In this context, the MPC views that maintaining the current policy stance is necessary to bring inflation down to the medium-term target range of 5%–7% by the end of FY25,” it said.According to the central bank, “broad money growth decelerated in May 2023 compared to last year, largely due to a substantial fall in private sector credit (PSC) and a contraction in net foreign assets of the banking system”.Budget ‘envisages slightly contractionary fiscal stance’The MPC reviewed “multiple important developments” since its last meeting.The interim National Accounts estimates showed “real GDP growth” decelerating in the current fiscal year. Second, it said that March and April 2023 current account surpluses “reduced some pressures on foreign exchange reserves”.

FY24 budget

Third, on June 9, the government released its FY24 budget, which is somewhat contractionary compared to FY23’s revised expectations. “Fourth, global commodity prices and financial conditions have eased recently and are expected to persist in the near term,” the statement stated.The MPC added that “substantial monetary tightening” is “still unfolding”.”On balance, the MPC regards the current monetary policy stance, with positive real interest rates on a forward-looking basis, as suitable to anchor inflation expectations and bring down inflation towards the medium-term target—barring any unanticipated internal and external shocks.


The MPC stressed that this forecast is also dependent on managing domestic uncertainty and external vulnerabilities, the central bank stated.
Fiscal and externalOn the external sector, the SBP reported that the current account has been responding to “demand-compression policies and regulatory mix” as the deficit reduced to $3.3 billion during Jul-Apr FY23, less than one-fourth of previous year’s deficit.Imports dropped more than exports and remittances. “The committee noted that the narrowing of the current account deficit has somewhat contained pressures on foreign exchange reserves and the interbank exchange rate, which has broadly remained stable since the last MPC meeting,” the statement added. However, “debt repayments amid lower fresh disbursements and weak investment inflows” create “pressure” on foreign reserves.


The committee believed that “baseline assumptions of the relatively favourable outlook for commodity prices and moderate domestic economic recovery next year” would keep the current account deficit “in check”.The fiscal condition “improved” during Jul-Mar FY23, as the fiscal deficit fell to 3.6% of GDP from 3.9% last year and the primary balance rose to 0.6% from a deficit.”Despite this cumulative improvement, fiscal indicators in Q3 deteriorated due to an increase in non-interest current expenditures, mostly subsidies, and a significant decrease in overall tax collection. “Usual end-year increase in developmental spending and further slowdown in revenue collection amidst substantial slowdown in domestic economic activity and contraction in imports, points to a further increase in the fiscal deficit in Q4,” stated the central bank.”Revised estimates” put the fiscal deficit at 7.0% and the primary deficit at 0.5% of GDP for FY23.


SBP Interest Rate Remains at 21%
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