Policy Rate Unchanged at 7PC - State Bank of Pakistan

 

The depository financial institution of Pakistan (SBP) announced on Friday that the Monetary Policy Committee (MPC) has decided to stay the rate of interest at 7 percent.

The decision was made during a gathering of the MPC held earlier within the day, wherein the committee noted that domestic recovery has gained some further traction since the last meeting in November.

“Most economic activity data and indicators of consumer and business sentiment have shown continued improvement,” the SBP said during a statement. “As a result, there are upside risks to the present growth projection of slightly above 2 percent in FY21,” the SBP.

It is the third time that the financial institution has kept its main policy rate unchanged after cutting it by 625 basis points, down from 13.25pc, at the time the worldwide pandemic hit its economy last February.

SBP Governor Reza Baqir, during a news conference after the committee’s meeting, said that within the “near future […] rate of interest will remain an equivalent and if, within the future, there's a change, it wouldn’t be like [in the past] when the rate of interest would see a sudden and drastic change. The change would be [introduced] in an orderly manner.”

In reference to inflation, recent out-turns are reportedly encouraging and suggest a waning of supply-side price pressures from food and still-benign core inflation. While utility tariff increases may cause an uptick in inflation, this is often likely to be transient given excess capacity within the economy and inflation expectations.

“The MPC’s inflation estimates are 7-9 percent,” he said but added a warning that a short-lived rise within the prices of food and beverages, also as electricity, were likely. 

Dr. Reza Baqir also noted that the assembly capacity wasn't being fully utilized. 

“The MPC has also given a direction to the longer term and therefore the SBP has provided guidance for the longer term also this point.

Inflation remains expected to fall within the aforementioned home in the present financial year and an extra trend toward the 5-7 percent firing range over the medium-term.

With this in mind, the MPC felt that the prevailing accommodative stance of monetary policy was appropriate to support the nascent recovery while keeping inflation expectations well-anchored and maintaining financial stability. 

On the opposite hand, the committee also stressed that there's still considerable uncertainty remains regarding this outlook. It acknowledged that the still-elevated global cases, the emergence of the latest strains, and lingering uncertainties about the roll-out of vaccines worldwide have made the trajectory of the Covid-19 pandemic is difficult to predict.

Such external shocks could slow the recovery, the MPC warned. However, within the absence of unforeseen developments, the MPC expects monetary policy settings to stay unchanged within the short-term.

“The [exchange] rate was at Rs162-163 and that we left it [to the free market], it became stable. [In] those nine months before Covid, it strengthened and decreased from Rs163 to Rs153-154. which suggests that the development within the accounting was due to an honest reason [which was] that the rate of exchange system was made more flexible,” Baqir said during the presser.

“It’s a basic advantage is that, in future, if there's a deficit within the balance of payments, rather than adding reserves and balancing it artificially, rate of exchange will play the role of a shock .”