KARACHI: The central bank kept the interest rate unchanged at seven percent on Friday to support the economic recovery while keeping inflation expectations well-anchored and maintaining financial stability.
“The monetary policy committee decided to maintain the policy rate at 7 percent,” the State Bank of Pakistan (SBP) said in a statement. “It is important for monetary policy to be supportive 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 SBP said growth and employment have continued to recover and business sentiment has further improved since the last meeting in January.
“While still modest, at around 3 percent, growth in FY21 is now projected to be higher than previously anticipated due to improved prospects for manufacturing and reflecting in part the monetary and fiscal stimulus provided during COVID,” it said. “The recent increase in electricity tariffs and sugar and wheat prices accounts for about 1½ 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 7-9 percent.”
The SBP had stopped reduction in interest rates after hefty 625 basis points cut last year to stimulate lockdown-ravaged economic activities. The interest rate remained unchanged since June last.
Change in soft monetary policy stance is linked with International Monetary Fund’s program, rising energy tariffs, and increasing oil and commodity prices, according to Topline Research that expects 100 basis points increase this year.
The SBP said recent increase in inflation is primarily due to supply-side factors. Inflation is expected to fall to the 5-7 percent target range over the medium-term.
“There is little evidence of de-anchoring of inflation expectations or economy-wide wage pressures. As a result, while headline inflation may continue to remain elevated in coming months due to administered prices and base effects, underlying price pressures from the demand-side or second-round effects should remain contained,” it said. This year’s upcoming round of wage negotiations, next year’s budget, and the path of domestic energy prices and international commodity prices may have an important bearing on the inflation trajectory.”
The SBP said capacity utilisation in a number of industries is still lagging and labor market slack remains despite growth in large scale manufacturing. A wide range of other high-frequency indicators signal robust growth, including sales of fast-moving consumer goods, automobiles, cement, oil and electricity. In services, transportation is benefiting from the pick-up in manufacturing, while business sentiment indicators foresee further improvements in both activity and employment in coming months. In agriculture, all major kharif crops except cotton have surpassed production levels in FY20 and targets for FY21, and indicators of input conditions—such as tractor sales, fertilizer usage, water availability, and weather—suggest strong prospects, especially for wheat.
The SBP said the current account deficit in FY21 is expected to remain below 1 percent of GDP given the outturn to date, continued strong prospects for remittances and the ongoing pickup in exports, especially high value-added textiles. “The recent staff-level agreement on the resumption of the IMF program has further boosted prospects and ensured that external financing needs will be comfortably met.”
The SBP said fiscal developments continue to evolve largely in line with the consolidation envisaged in this year’s budget, as the necessary fiscal stimulus imparted in Q4 of FY20 is unwound.