Unchanged at 7%

SBP’s policy of keeping the interest rate high to what experts believe attract hot money

May 30, 2021

The SBP has kept its benchmark interest rate unchanged at 7% — the level the rate was progressively brought down to in June 2020, from 13.25% in July 2019, as part of measures to offset the impact of the Covid-19 pandemic on the businesses. The economy is showing signs of recovery of late which is reflected by a projected growth rate of nearly 4% for the ongoing fiscal year; and the central bank believes that the monetary policy needs to “remain supportive” in order to “ensure the recovery becomes firmly entrenched and self-sustaining”.

While the central bank did note that inflation had been on the rise since January, it elaborated that “a small number of energy and food items accounted for about three-fourths of this rise” — implying that the core inflation does not compel an increase in the interest rate.

Moreover, since uncertainty does persist currently due to the reigning third wave of the coronavirus, it necessitates status quo on the SBP policy rate so as to maintain the business confidence and keep the momentum going. Providing future guidance, the central bank says that its monetary policy committee “expects monetary policy to remain accommodative in the near term, and any adjustments in the policy rate to be measured and gradual to achieve mildly positive real interest rates over time”.

The coronavirus outbreak last year had triggered an about-turn on the SBP’s policy of keeping the interest rate high to what experts believe attract hot money and bolster foreign exchange reserves. The sharp reduction in the rate in the post-Covid period, coupled with several growth-intended measures adopted by the central bank as well as the government, has had a positive impact on trade and business activities. The SBP is, therefore, expected to maintain the status quo on its monetary policy in the near to medium term.

Published in The Express Tribune, May 30th, 2021.

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