The government has informed the International Monetary Fund (IMF) that the policy rate was raised to 22 percent, and it stands ready to respond firmly if near-term price pressures reemerge, including due to stronger-than-expected second-round effects on core inflation, or if pressures on the exchange rate reemerge amid the normalization in the current account.
This has been revealed in the IMF report, “First Review under the Stand-By Arrangement.”
Amid signs of weaker demand, favorable supply developments, and receding pressures from the exchange rate, the government expects inflation to decline over the coming months notably. Thus, Pakistan maintained the policy rate at 22 percent at its latest Monetary Policy Committee (MPC) meeting.
The government is ready to respond firmly if near-term price pressures reemerge, including due to stronger-than-expected second-round effects on core inflation, or if pressures on the exchange rate reemerge amid the normalization in the current account.
The goal is to ensure that inflation and inflation expectations are on a clear downward path, with the exact pace of future adjustments dependent on inflation data, exchange rate developments, the strength of the external position, and the fiscal-monetary policy mix.
To this end, the government will aim to ensure that the real policy rate remains in clear positive territory on a forward-looking basis to signal a commitment to bring inflation within the target band within the fiscal year 2026.
To strengthen monetary policy transmission, the interest rate on the two major refinancing schemes (EFS and LTFF) will continue to be linked to the policy rate with a spread of no more than 3 percentage points, Pakistani authorities added.
The report stated that although the forward-looking real policy rate has returned to positive territory, there is no room for complacency given near-term risks. With inflation expectations still not firmly anchored, utmost caution is warranted, and the MPC should respond forcefully and without delay if inflationary pressures reemerge.
Maintaining a real policy rate in clear positive territory as inflation eases and reacting to any signs of new demand pressures or increasing inflation expectations will help re-anchor inflation expectations and guide down core inflation from FY24H2 onwards, provided there is no resumption in administrative import compression.
Headline inflation is projected to decline significantly through FY25-26, falling within the 5–7 percent target range within FY26, supported by fiscal consolidation and the normalization of global commodity prices.
While staff sees the stance as broadly appropriate at the current juncture given weak domestic demand, the MPC should stand ready to respond firmly if near-term price pressures reemerge, including due to second-round effects, and ensure that the real policy rate remains in clear positive territory.
Further, it is important to continue work towards improving monetary transmission, including through the gradual phaseout of SBP’s involvement in refinancing schemes, and by strengthening internal control systems around monetary policy lending operations as recommended by the 2023 Safeguards Assessment Report.
