Unchanged policy rate

Maintaining its support to the economy that continues to feel the heat of the reigning pandemic, the SBP has announced keeping its policy rate unchanged at 7% for the next two months. It’s been more than a year now that the policy rate has not undergone any change. From 13.25% in March 2020, the central bank slashed the benchmark interest rate by 6.25% over three months to bring it down to 7% in a bid to deal with the impact of the Covid-19 outbreak on the businesses.

A relatively low interest rate for about a year did serve to galvanise the wheels of the economy, as the availability of cheaper working capital led to revival of interest of the business community in bank borrowing — something that spurred the economic activity in the country, thereby raising the GDP growth rate to an expected level of close to 4% in the previous fiscal year as against forecasts of something between 2 to 3% by global financial institutions.

Announcing the monetary policy decision on Tuesday, SBP governor Dr Reza Baqir noted that since the pandemic was not over, the central bank wanted to “give a feeling of stability to the nation” and show that its “supportive monetary policy” would be maintained. What is further encouraging for the business community in the country is that Baqir gave the assurance that “if there was a need to change the monetary policy, the change would come in a gradual way” and not like it was done in 2019 when “the conditions of our economy were very different [as] we had a very large external deficit”.

While a low policy rate helps spur the economic growth, it also poses risks of an overheated economy. Therefore, there is need to bring down the rate of inflation in the country which — despite coming down to 8.9% in June from at 9.7% in April — is still high.

Published in The Express Tribune, July 29^th, 2021.

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