Monetary policy: SBP leaves interest rate unchanged at 7%

Decision largely in line with market expectations

KARACHI:

The State Bank of Pakistan (SBP) left the benchmark interest rate unchanged at 7% for the next two months.

The decision taken by the SBP Monetary Policy Committee (MPC) was largely in line with market expectations, as the policy remains an effective tool available with the central bank to control inflation.

“The interest rate is left unchanged...on threat of uptick in inflation in short term,” said SBP Governor Reza Baqir addressing a press conference on Monday.

SBP kept its projection for average inflation for full year FY21. Economic activities are gradually improving. SBP anticipates economic growth at 2% in FY21.

The central bank adjusts its policy rate according to the inflationary trend. A high inflation reading demands an increase in the policy rate to make borrowing expensive and low inflation leads to a reduction in the policy rate to stimulate business expansion.

Earlier, the Covid-19-induced lockdown in the country and across the globe prompted the central bank to cut the policy rate by a significant 625 basis points in a period of four months from March to 7% in June 2020.

Against the backdrop of receding demand-side inflation risks, the priority of monetary policy has appropriately shifted toward supporting growth and employment during these challenging times.

However, the International Monetary Fund’s (IMF) ongoing loan programme has been put on hold ahead of increase in electricity and gas tariffs.

At the same time, the country’s foreign income is shrinking gradually while its expenditures are growing with Prime Minister Imran Khan considering announcing a second relief package for households and businesses to help them cope with Covid-19.

On the flip side, the average inflation reading shrank to 8.74% in the first two months (Jul-Aug) of current fiscal year, which was in line with the central bank’s projection of 7-9% inflation for FY21.