Home Latest News State Bank of Pakistan Maintains Policy Rate at 7%

State Bank of Pakistan Maintains Policy Rate at 7%

by Newsweek Pakistan

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Central bank says accommodative monetary policy to continue in near-term, barring unforeseen circumstances

The State Bank of Pakistan on Tuesday announced it has decided to maintain the policy rate at 7 percent for the next two months.

“At its meeting on July 27, 2021, the Monetary Policy Committee decided to maintain the policy rate at 7%,” read a statement issued by the central bank after the committee’s meeting. It said that the decision had been reached after considering key trends and prospects in the real, external, and fiscal sectors, as well as the resulting outlook for monetary conditions and inflation.

In a press conference, SBP Governor Reza Baqir noted that this marked the fifth consecutive time that the central bank had decided to maintain the policy rate, adding that it was currently lower than the inflation rate. “Economic experts term this a negative interest rate,” he said. “The reason for keeping the real interest rate negative is a focus on growth,” he added. He also noted that Pakistan’s current account deficit was the lowest it has been in the past decade.

Encouraging recovery

In its statement, the SBP said that the committee had been encouraged by continued domestic recovery and improved inflation outlook following a recent decline in food prices and core inflation. It claimed that consumer and business confidence had risen to multi-year highs while inflation expectations had fallen, adding it believed this would boost growth from 3.9 percent in FY21 to 4-5 percent this year and bring average inflation down to 7-9 percent.

“Imports are expected to grow on the back of the domestic recovery and rebound in global commodity prices, albeit more moderately than in FY21,” it said, adding that a market-based exchange rate, resilience in remittances, an improving outlook for exports, and appropriate macroeconomic policy settings should help contain the current account deficit within a sustainable range of 2-3 percent of GDP in FY22. It said the country’s foreign exchange reserves were expected to continue to improve this year due to adequate availability of external financing.

Barring unforeseen circumstances, read the statement, the committee expects monetary policy to remain accommodative in the near term. However, it warned, that if signs emerge of demand-led pressures on inflation or of vulnerabilities in the current account, it would be prudent for monetary policy to begin to normalize through a gradual reduction in the degree of accommodation.

“Pakistan’s economic recovery continues, driven by industry—particularly large-scale manufacturing and construction—and services,” it said.

The SBP warned that a key risk to growth remained a possible resurgence of COVID-19 due to new strains and low vaccination rates. “For FY21 as a whole, the MPC noted that Pakistan’s external position was at its strongest in several years,” it said, adding, “In line with SBP projections in March 2021, the current account deficit fell to only 0.6% of GDP.”

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