IGI Securities Limited - Day Break.

Karachi -- January 23, 2023 (PPI-OT)

Economy - SBP Increased Policy Rates by 100bps to 17%

The Monetary Policy Committee (MPC) decided to increase the policy rate by 100 basis points to 17%. This is in line with our expectation and market consensus.

Key Highlights

The MPC noted that inflationary pressures are persisting and broad-based, which could feed into higher inflation expectations over a longer period.

The MPC emphasized the importance of anchoring inflation expectations and achieving price stability to support sustainable growth.

The MPC highlighted three key economic developments: continuing elevated inflation, increased challenges for the external sector, and uncertain global economic and financial conditions.

The MPC reiterated that the short-term costs of bringing down inflation are lower than the long-term costs of allowing it to become entrenched.

The MPC emphasized the need for engagements with multilateral and bilateral partners to address domestic uncertainty and near-term external sector challenges.

Real sector: Downside risks to SBP growth projections remain plenty

Broad-based and sustained moderation in economic activity due to policy tightening and exogenous shocks like floods.

Production cuts and supply constraints could pull LSM growth further down.

Latest data on cotton arrivals point to lower crop production than anticipated earlier, which could potentially weaken the agriculture sector outlook.

MPC views that downside risks to the SBP's baseline growth (SBP growth projections 2-3% in FY23) outlook for this year have increased.

External Sector: Resumption of 9th IMF review critical for stabilizing external accounts

Current account deficit narrowed due to sharp contraction in imports reflecting the impact of policy tightening and administrative measures.

MPC noted that effective implementation of energy conservation measures and appropriate pricing of petroleum products is critical for reducing energy imports.

External sector remains under...