Monetary policy SBP keeps interest rate unchanged at 7%

In line with market expectations, the State Bank of Pakistan (SBP) on Tuesday maintained status quo and left the benchmark interest rate unchanged at 7% for the next two months.

Market researchers had anticipated no change in the policy rate as the SBP strongly hinted in monetary policy statements for March and May that it might maintain the rate at the current level of 7% until the economy recovers from Covid-19 pandemic.

The SBP kept the interest rate unchanged to support businesses during the Covid-19 pandemic.

More importantly, the country is currently witnessing a fourth wave of the pandemic as the infection ratio has jumped to 23-24% in the port city of Karachi. Other big cities in Punjab are facing a similar situation.

The health crisis and the resolve to let the economy grow at a higher rate encouraged the central bank to keep the benchmark interest rate unchanged at the current level of 7% despite the real interest rate (the benchmark interest rate minus inflation reading) hovering at negative 3%.

Besides, the inflation reading surged close to 9% in the preceding fiscal year, which was the upper limit of the central bank’s projection of 7-9% inflation for the year.

Earlier, due to the lockdown imposed to contain the spread of Covid-19 in the country, the SBP had aggressively slashed the benchmark interest rate by 625 basis points from March to June 2020 to 7%.

The monetary policy is an effective tool with the central bank that is used to curb inflation. The SBP announces a target rate every two months, which serves as the benchmark for overnight funds in the interbank market.

The policy rate is revised up or down or kept unchanged in relation to the inflation reading and economic activities. Low inflation leads to a reduction in the policy rate in a bid to ramp up economic activities and vice versa.