Pakistan

Monetary policy: SBP keeps ‘target rate’ unchanged

The policy rate of 6.5% now represents the newly introduced ‘target rate’ as opposed to the discount rate of 7%

Kazim Alam July 25, 2015

The SBP said the decision to keep the policy rate unchanged is based on a sharp decline in CPI inflation. PHOTO: ATHAR KHAN/EXPRESS

KARACHI: In line with market expectations, the State Bank of Pakistan (SBP) announced on Saturday to keep the policy rate unchanged at 6.5% for the next two months.

After a revision of the SBP’s Interest Rate Corridor (IRC) a couple of months ago, the policy rate of 6.5% now represents the newly introduced ‘target rate’ as opposed to the discount rate of 7%.

The discount rate is the effective ceiling interest rate at which commercial banks are allowed to borrow from the central bank’s discount window on an overnight basis. The target rate, however, is now the policy rate that indicates the SBP’s stance of monetary policy going forward.

Following its ‘accommodative’ monetary policy stance, the SBP cut the key interest rate by 300 basis points in the last fiscal year. The SBP said the decision to keep the policy rate unchanged is based on a sharp decline in CPI inflation, along with its benign outlook, and improvement in external account.

In addition, the SBP said, the reduction in fiscal deficit and continuation of the Extended Fund Facility (EFF) improved the market sentiments, leading the SBP to keep the discount rate at the 42-year record low of 7%.