KARACHI: In line with market expectations, the Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) has decided to maintain the status quo in interest rate at 9.75 percent.
During the meeting on Monday, the SBP left the benchmark interest rate unchanged at 9.75% for the next one-and-a-half month.
The decision was largely in line with market expectations where the majority of the market participants expected SBP to keep the policy rate unchanged after high ranking officials from the central bank reiterated that they would hold the rate in the medium-run and wait for responses to come against the measures taken so far.
Stability in the rate does not mean the current cycle of the rate hike has come to an end and there is still room available for another hike of 50-100 basis points in the second half (Jan-Jun) of fiscal year 2022.
Conflicting movements in economic indicators suggest that the worst is yet to come but still the market had developed consensus that the policy rate would remain unchanged. Despite monetary tightening, the SBP estimates that the inflation reading and current account deficit would remain high in the current fiscal year compared to its previous projections.
Accordingly, it revised up its estimates for inflation to 9-11% in December 2021 for the full fiscal year compared to earlier projection of 7-9%. It also revised up the estimate for the current account deficit to 4% of GDP (gross domestic product) for the fiscal year against 2-3% of GDP anticipated earlier.
Owing to the lockdown imposed to contain the spread of Covid-19 in the country in March 2020, the SBP had aggressively slashed the benchmark interest rate by 625 basis points from March to June 2020 to 7%. However, the central bank raised it to 9.75% during September-December 2021 to control rising inflation and narrow down the widening current account deficit.
In its monetary policy announcement on November 19, the State Bank of Pakistan increased the number of annual monetary policy meetings to eight from six. The monetary policy is an effective tool with the central bank that is used to curb inflation. The SBP announces a target rate every two months, which serves as the benchmark for overnight funds in the inter-bank market
It is pertinent to mention here that earlier SBP increased the benchmark interest rate by 100 basis points to 9.75 percent in a bid to counter inflationary pressures and to ensure sustainable growth.
The market was expecting a steep hike in the interest rate up to 150 basis points owing to ballooning imports and soaring trade and current account deficits. The increase is expected to put brakes on the accelerated inflation reading. In a statement, the central bank said, “Given rate increases since September and outlook, the Monetary Policy Committee felt that the end goal of mildly positive real interest rates on a forward-looking basis was now close to being achieved.” – TLTP