KARACHI – In line with market expectations, the State Bank of Pakistan (SBP) announced on Tuesday to keep the interest rate unchanged at 7% for the next two months (August and September).
“At its meeting on 27th July 2021, the Monetary Policy Committee (MPC) decided to maintain the policy rate at 7 percent. Since its last meeting in May, the MPC was encouraged by the continued domestic recovery and improved inflation outlook following the recent decline in food prices and core inflation,” SBP said in a statement.
Traditionally, the SBP revises its policy rate up or down, or keeps it unchanged in relation to the inflation reading and economic activities.
Low inflation mainly leads to a reduction in the policy rate for ramping up economic activities and vice versa. The rate is left unchanged at a higher level to tame inflation or on the lower side to support economic growth.
Addressing a press conference SBP Governor Reza Baqir said that this is the fifth consecutive time that the policy rate was left unchanged.
He said that the interest rate is lower than the inflation rate, adding that economic experts call it a negative interest rate.
In addition, consumer and business confidence have risen to multi-year highs and inflation expectations have fallen.
As a result of these positive developments, growth is projected to rise from 3.9 percent in FY21 to 4 – 5 percent this year, and average inflation to moderate to 7 – 9 percent this year from its recent higher out-turns.
Imports are expected to grow on the back of the domestic recovery and rebound in global commodity prices, albeit more moderately than in FY21.
The MPC noted that the market-based flexible exchange rate system, resilience in remittances, an improving outlook for exports, and appropriate macroeconomic policy settings should help contain the current account deficit in a sustainable range of 2 – 3 percent of GDP in FY22.
Notwithstanding this moderate current account deficit, the country’s foreign exchange reserves position is expected to continue to improve this year due to adequate availability of external financing.
Against this backdrop, the MPC felt that the uncertainty created by the on-going fourth Covid wave in Pakistan and the global spread of new variants warrants a continued emphasis on supporting the recovery through accommodative monetary policy.
