LONDON: Fitch Ratings has maintained its view that the State Bank of Pakistan (SBP) will keep its benchmark policy rate constant at 7.00 percent through the fiscal year 2021-22 to continue supporting the economy through the country’s fourth wave of the Covid-19 pandemic.
In a latest report, Fitch was of the view that the SBP will continue to keep its monetary policy loose until the pandemic-related risk has significantly abated and domestic demand-side price pressures become stronger.
“With the country grappling with a fourth wave of cases as of August, we expect the economy to take a further hit due to the re-imposition of containment measures,” said Fitch. On August 1, the National Command and Operation Centre (NCOC) declared that new restrictions in major cities will commence on August 3 and last until August 31.
“With the spectre of Covid-19 looming over the country, we maintain our belief that intermittent lockdown measures will likely occur throughout the year, thereby hampering the county’s economic recovery. Given we do not expect the economy to return to full capacity in the short run, we hold the view that the SBP will believe it necessary to keep monetary policy accommodative to support its recovery.”
Underscoring the belief for pandemic-related risks to persist over the short run is Pakistan’s still-low vaccination rate. While the government’s aggressive approach to vaccinations – such as threatening to block SIM cards and denying access to offices and public amenities for the unvaccinated – has made some headway in boosting the vaccination rate, overall rates still lag behind the world average, said Fitch.
“We attribute this to a shortage in vaccine supply, thereby preventing the government from accelerating its Covid-19 rollout programme. Indeed, with Pakistan only being able to secure enough vaccines to get 26% of its population fully inoculated, according to Bloomberg Vaccine Tracker, we believe achieving herd immunity is unlikely in the short term,” said Fitch.
Despite the economic challenges, Fitch sees some near-term upside pressures on inflation. While the headline inflation further slipped from 9.6 percent year-on-year (YoY) in June to 8.4 percent in July, this figure is still above the midpoint of the SBP’s inflation target. Inflation has been elevated in recent months due to surging oil prices coupled with supply-chain disruptions from the pandemic. These factors, in addition to hikes in electricity tariffs and food prices (such as sugar, wheat flour, and ghee), will likely cause inflationary pressures to persist over the coming months.
“That said, we expect the central bank will look past these upside pressures and instead prioritise supporting the country’s economic recovery,” said Fitch.
“The risks to our monetary policy outlook are weighted to the upside. A better-than-expected economic recovery could lead to more persistent demand-side price pressures and feed through to a widening current account deficit, putting pressure on Pakistan’s external financing position.
“In such a scenario, we would expect the SBP to begin normalising its monetary policy stance to cool the domestic demand surge. We also flag potential supply-side price shocks, given continued disruptions to global supply-chains from the pandemic and potential border closures amid the recent instability in Afghanistan,” said Fitch Ratings. – TLTP