Zubair Yaqoob
Karachi
The Monetary Policy Committee (MPC) decided to keep the policy rate unchanged at 13.25 percent. The decision reflected the MPC’s view that the outlook for inflation has remained broadly unchanged.
On the one hand, recent inflation outturns have been on the high side and there remain near term risks to inflation primarily from food price shocks and potential increases in utility prices. On the other hand, several factors are expected to gradually moderate the pressure on inflation.
These include the recent appreciation of the exchange rate after the introduction of the market-based exchange rate and ongoing fiscal consolidation. On balance, the SBP’s projection for average inflation remained broadly unchanged at 11 – 12 percent for FY20. The MPC also viewed the current monetary policy stance as appropriate to bring inflation down to the medium-term target range of 5 – 7 percent over the next six to eight quarters.
The central bank has held rates at 13.25pc since July, when it took a pause from a series of hikes at a level some businesses and exporters have said is hampering investment.
“While controlling inflation we also have to support sectors that contribute to our exports,” SBP Governor Dr Reza Baqir said at the bank’s first monetary policy announcement of 2020.
Inflation rose 12.6pc in the year to December, just below an almost nine-year high of 12.7pc hit a month earlier, as rising costs for items like food put pressure on household budgets and rising oil and power prices lifted costs for businesses.
Baqir explained that the interest rate has not been changed as the inflation rate is expected to remain at 11 to 12pc this year. However, he said, improvements in supply are likely to reduce inflation.
“Inflation will start declining gradually, but when we’re not sure, we can’t say,” Baqir said.
He said economic stability in the country is further improving with job creation expected to rise. According to the SBP governor, agricultural production may not meet its target this year.
The bank also announced measures to support exporters, such as increasing credit limits, underscoring the toll historically high rates are having on businesses for whom the prospect of higher borrowing costs could lead to holding off on investment.
Defending the elevated interest rate, Baqir said it is lower than the Pakistani historical average of 3pc real interest rate. He added that Pakistan’s real interest rate is also comparable to those of other countries.
