While the State Bank of Pakistan (SBP) has delivered Asia’s boldest hikes since September 2021 in exchange for “intended results,” the situation in Ukraine and its impact on worldwide oil prices have complicated the outlook, according to Governor SBP, Reza Baqir.
In an interview with CNBC, Governor SBP, Dr. Baqir said, “In the Monetary Policy Committee Meeting, there were two key main messages. The first message was that the monetary tightening is already done by Pakistan’s central bank — which is around 275 basis points since September 2021 and the highest in Asia — is beginning to deliver the intended results.”
He asserted that the central bank’s tightening since September of last year “is beginning to deliver results. [However], what has thrown a wrench — a complication — in the outlook is the conflict in Ukraine and the impact on international oil prices.”
Baqir stated that the SBP is seeing a moderation in growth and expects GDP growth to be between 4-5 percent this year.
He stated, “We are also seeing inflation beginning to moderate from 13 percent in the previous month to around 12 percent in the most recent reading and were it not for a few perishable food items, the inflation reading would have been even lower. Equally importantly, a trade deficit, which was around $5 billion in November, in February was $3 billion, down 40 percent.”
The Monetary Policy Committee was of the opinion that it should be prepared to convene before the next scheduled meeting in end-April and take whatever action necessary. Dr. Reza Baqir said, “I would remind that the central bank of Pakistan has met in the past as well in emergency meetings. And since we adopted forward guidance, we have believed in giving a heads-up to markets if we think the uncertainty has become more pronounced such that another meeting may be needed”.
In response to a question whether SBP would stick to the scheduled meeting in April or forgo the entire protocol altogether, the governor commented,
It is not a foregone conclusion yet. If it were, we would have already raised interest rates. Our baseline scenarios run where the current level of real interest rates is already delivering the moderation in demand and inflation that we were hoping for. However, our forward guidance about possibly meeting, if needed before the next meeting, is about risks around the baseline, and in the interest of giving some predictability to decision-makers, we are transparently communicating the thinking in the Monetary Policy Committee.
Looking back on how things have fared so far, Dr. Baqir contended, “there have generally been more unknowns than knowns in the last couple of years.”
Notably, the SBP has raised interest rates by a total of 275 basis points thrice in quick succession since September 2021 to cool the region’s headline inflation. This has weighed heavily on the Rupee, which has been the weakest performer among 13 Asian currencies monitored by rating agencies for the past six months.
Accordingly, to minimize the pressure of foreign exchange outflows, the country needs to explore other avenues to build reserves and potentially support the depreciating Rupee.
