State Bank of Pakistan.
PHOTO: FILE
Addressing a press conference, SBP Governor Ashraf Wathra said the target rate will be 5.75% for August-September.
Earlier, most analysts expected the State Bank of Pakistan (SBP) to keep the benchmark interest rate unchanged in the monetary policy announcement.
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The SBP announces a target rate every two months, which serves as the benchmark interest rate for overnight funds in the interbank market. It is one of the tools that the central bank uses to ensure price stability in the economy.
Decreasing the target rate poses the risk of high inflation, but also stimulates economic growth by making credit cheaper. In contrast, raising the target rate restricts the level of liquidity, which subdues consumer prices in the economy.
The central bank tries to strike a balance by targeting the overnight cost of funds at a level that promotes maximum economic growth without causing high inflation.
In a recent survey conducted by Bloomberg, nine out of 10 economists said they expected the target rate to remain at 5.75% for the next two months.
As measured by the Consumer Price Index (CPI), inflation for June remained at 3.2% on a year-on-year basis. The SBP is expecting inflation to clock up between 4.5-5.5% for 2016-17.
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The newly established Monetary Policy Committee (MPC), which is headed by the SBP governor and includes three independent economists as external members, takes the decision to revise or maintain the target rate after taking into account factors like anticipated inflation, foreign exchange reserves, commodity prices, etc.
The MPC had reduced the target rate by 0.25% in its last announcement in May. The move had surprised most analysts, as the SBP itself stated at the time that it was expecting inflation to “attain a higher plateau.”
Yet eight of the nine MPC members ended up favouring a rate cut, although each of the 22 analysts polled by Bloomberg in May expected a no-change announcement.
SBP Governor Ashraf Wathra told Bloomberg on Thursday the MPC will be “cautious this time making a move either way” given the possibility of an increase in inflation.
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