SBP decided to keep policy rate at 7pc

KARACHI: The State Bank of Pakistan’s (SBP) Monetary Policy Committee (MPC) on Friday decided to maintain the policy rate at seven percent.
“The MPC of SBP maintained policy rate at 7pc,” the central bank said in a statement, adding that the current stance of the monetary policy was appropriate to support economic recovery, maintain financial stability and keep inflation expectations “well-anchored”.
“MPC viewed recent inflation uptick as primarily driven by supply side factors and saw little signs of demand-led inflation. As the temporary increase in inflation from administered prices subsides, inflation should fall to the 5-7pc target range over the medium-term,” the SBP said.
The MPC expects monetary policy settings to remain “broadly unchanged” in the near term, the statement added, emphasising that any adjustment in the policy rate would be measured and gradual to achieve “mildly positive real interest rates” as recovery became more durable and the economy returned to full capacity.
The MPC noted that the monetary policy should be supportive considering the “fiscal policy is expected to remain contractionary to reduce public debt” and from a policy mix perspective.
This support period would continue as long as “second-round effects of recent increases in administered prices and other one-off supply shocks do not materialise and inflation expectations remain well-anchored”, the statement said.
Uncertainty on the inflation and growth outlook was also a factor in the MPC’s decision on the policy rate. In particular, the threat posed by the “emergence of a third, more virulent wave of Covid in Pakistan” was noted as a point of concern for growth, despite vaccine rollout and recent momentum in the economy.
“In terms of the inflation outlook, this summer’s wage negotiations and any new tax measures in the next year’s budget could add further supply-side shocks.
“In addition, optimism about a stronger US-led world recovery this year is translating into higher international commodity prices, including both food and oil, which could continue to feed into domestic inflation.”
The committee also considered key trends and prospects in the real, external and fiscal sectors, and the resulting outlook they would have for monetary conditions and inflation. “These trends in the outlook for inflation and growth will need to be carefully monitored,” the statement said.
The MPC noted overall positive trends since its last meeting in January with continued recovery of growth and employment, and improvement in business sentiment. “While still modest, at around 3pc, growth in FY21 is now projected to be higher than previously anticipated,” the statement said, crediting the higher projection to improved manufacturing prospects and the fiscal and monetary stimulus provided during the Covid-19 pandemic.
The SBP noted, however, that recent inflation turnout had been volatile, “with the lowest reading on headline inflation in more than two years in January 2021 followed by a sharp rise in February”.
According to SBP estimates, the recent increase in electricity tariffs and sugar and wheat prices was responsible for about 1.5 percentage points of the 3-percentage point increase in inflation between the January and February out-turns. “The recent increase in electricity prices will continue to manifest in headline numbers in coming months, keeping average inflation in FY21 close to the upper end of the previously announced range of 7-9pc.” – TLTP