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SBP maintains policy rate unchanged at 7pc

SBP maintains policy rate unchanged at 7pc

KARACHI: The State Bank of Pakistan (SBP) Monetary Policy Committee has kept the policy rate unchanged at 7 percent for the next two months on Friday.

Addressing media on Friday, Governor State Bank of Pakistan Dr Reza Baqir said that the MPC looked into the yearly inflation rate is projected to remain at 7-9pc as previously announced. There could be some changes in the projection due to change in electricity rates, and international oil prices but it will be temporary so MPC decided not to adjust the interest rates, said Baqir.

The MPC noted that since the last meeting in November, the domestic recovery has gained some further traction. Most economic activity data and indicators of consumer and business sentiment have shown continued improvement. As a result, there are upside risks to the current growth projection of slightly above 2 percent in FY21.

On the inflation front, recent out-turns are also encouraging, suggesting a waning of supply-side price pressures from food and still-benign core inflation. While utility tariff increases may cause an uptick in inflation, this is likely to be transient given excess capacity in the economy and well anchored inflation expectations.

As a result, inflation is still expected to fall within the previously announced range of 7-9 percent for FY21 and trend toward the 5-7 percent target range over the medium-term.

With the inflation outlook relatively benign aside from the possibility of temporary supply-side shocks, the MPC felt that the existing accommodative stance of monetary policy remained appropriate to support the nascent recovery while keeping inflation expectations well-anchored and maintaining financial stability.

Since June 2020, the committee has kept the policy rate unchanged at 7 percent to support the economy, which was badly hurt due to Covid-19 pandemic and recorded negative 0.4 percent GDP growth in FY20.

 

The MPC however stressed that considerable uncertainty remains around the outlook. In a statement it said that the trajectory of the Covid pandemic is difficult to predict, given still-elevated global cases, the emergence of new strains, and lingering uncertainties about the roll-out of vaccines worldwide. Such external shocks could slow the recovery.

In light of such Covid-related uncertainties, the MPC considered it appropriate to provide some forward guidance on monetary policy to facilitate policy predictability and decision-making by economic agents. In the absence of unforeseen developments, the MPC expects monetary policy settings to remain unchanged in the near term.

As the recovery becomes more durable and the economy returns to full capacity, the MPC expects any adjustments in the policy rate to be measured and gradual to achieve mildly positive real interest rates.

 

Earlier, most of economist and analysts optimistic about the inflation outlook expected that the committee will keep the policy rate unchanged at 7 percent for next two months to support the economic recovery. “We expect interest rate to remain stable at current level as inflation is likely to move towards lower side in January,” they added.