SBP to maintain Policy rate in Pakistan at 7%
The State Bank of Pakistan (SBP) has maintained its policy rate at 7 percent in Pakistan.
The Monetary Policy Committee (MPC) decided in its meeting held on Friday to maintain the policy rate at 7 percent by the State Bank of Pakistan (SBP).
Since its last meeting in March, the further upward revision in the FY21 growth forecast to 3.94 percent had encouraged MPC. The MPC noted that this confirms the strength of the broad-based economic rebound underway since the start of the fiscal year, on the back of targeted fiscal measures and aggressive monetary stimulus.
Inflation rose to 11.1 percent (y/y) in April, propped up by the lingering impact of this February’s electricity tariff increase as well as a pick-up in month-on-month food prices, partly driven by the usual seasonality around Ramzan.
The MPC noted while taking a decision of policy rate that supply-shocks to food and energy still dominate, with a small number of energy and food items in the CPI basket accounting for about three-fourths of the rise in inflation since January. The MPC also observed that although core inflation in urban areas has risen by around 1.5 percentage points during this period, available evidence suggests that demand-side pressures on inflation continue to be relatively contained.
This reflects the fact that despite the economic recovery, there is still some spare capacity following last year’s contraction. Second-round effects from the supply shocks are also not visibly apparent: price pressures are concentrated in a few items, wage growth is subdued keeping a cap on costs, and inflation expectations remain reasonably anchored.
As previously forecast, the headline year-on-year inflation rate is likely to remain elevated in the coming months due to the recent electricity tariff hike, pushing the average for FY21 close to the upper end of the announced range of 7-9 percent. As supply shocks dissipate thereafter, inflation is likely to gradually fall toward the 5-7 percent target range over the medium-term.
In light of the foregoing considerations, the MPC was of the view that the current significantly accommodative stance of monetary policy remains appropriate to ensure the recovery becomes firmly entrenched and self-sustaining. The MPC observed that given the Covid-related uncertainties, the cost of withdrawing monetary stimulus too soon exceeded that of withdrawing too late. Therefore, it decided to keep the policy rate unchanged in Pakistan.
Looking ahead, in the absence of unforeseen circumstances, the MPC expects monetary policy to remain accommodative in the near term, and any adjustments in the policy rate to measure and gradual to achieve mildly positive real interest rates over time. MPC noted that it would be prudent for monetary policy to begin to normalize through a gradual reduction in the degree of accommodation.
This would help ensure that inflation does not become entrenched at a high level and financial conditions remain orderly, thereby supporting sustainable growth. 5. In reaching its decision, the MPC considered key trends and prospects in the real, external, and fiscal sectors, and the resulting outlook for monetary conditions and inflation.
