SBP maintains Interest Rate at 7%

Growth outweighs Trade Deficit

Reza Baqir has instilled confidence back and is putting his weight behind growth.

Prior to SBP's Press Conference, there was a tangible adverse "wave" of bad health due to;

- PkR rush from Rs 152 to Rs 162/USD
- June's Current Account Deficit (CAD) of $1.6b
- Delay in IMF's review
- High commodity prices

All is well, says the Doctor Baqir.

Seemingly, the Monetary Policy Committee remains dove-ish citing;

- 2-3% worth of GDP as CAD is a new normal & sustainable
- falling inflation expectations to a medium term target of 5-7%
- FY 22 inflation expectation of 7-9%
- more than covered financing for a CAD of 2-3% of GDP
- 4th wave of Covid
- Higher FX reserves expected
- IMF's new SDR ~$2.8b
- PkR fall in line with USD strengthening
- $1.8b inflows from RDA
- Price pressures to dissipate in 2HFY22
- High base effect of electricity tariff to taper from Feb 22
- One-off govt (defence?) & covid vaccine imports in May/June

However, any uptick in the Interest Rates is rather dependent on:

- Demand-led inflation
- Current Account vulnerabilities

..and that too, to achieve "some normalization" towards "mildly" real interest rate "over time".

While giving details of SBP's impact on economy, SBP highlights:

- Rs 124b applications, Rs 45b approved, Rs 5.8b disbursed
- # 36,000 application, 14,000 approval, 2160 disbursed
- Collateral-free SME financing scheme along with govt risk-sharing
- TERF Rs 163b disbursed in FY21, Rs 273b in FY 22

Dr Baqir is clearly outlining his comfort over inflation - thanks to lower PDL/GST on fuel - new normal CAD of 2-3% of GDP, expected comfort over rising FX reserves & relatively better, fiscal damage post-covid.

It seems government has covertly assured of lower taxes on fuel/food to create an "enabling" environment for Dr Baqir for his accommodative monetary policy. Naturally, any decline in PDL collection would be off-set by lower financing costs for the govt & equal stimuli to the businesses/economy. Worth a shot!

CAD numbers would dictate the next monetary policy as well. So far, the base case for next meeting is "no change". Good confidence-building for investors, business, analysts & governments.