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Pakistan

Web Desk
September 21, 2020

SBP maintains benchmark rate at 7%

Pakistan

Web Desk
Mon, Sep 21, 2020
MPC, in its last meeting, had reduced interest rates by 625 basis points to 7% between March and June to support economic growth in response to COVID-19 challenges. Photo: File

KARACHI: The monetary policy of the country will remain unchanged at 7%, confirmed the State Bank of Pakistan (SBP) on Monday

In a press release, the SBP noted that business confidence and the growth outlook in the country had improved since the last meeting held by the central bank in June.

"This reflects the decline in Covid-19 cases in Pakistan and the easing of lockdowns, as well as the timely stimulus provided by the Government and SBP. At the same time, the forecast for inflation has risen slightly, primarily due to recent supply side shocks to food prices," said the bank.

The SBP said that average inflation was expected to decline to 7-9% for FY21 "rather than marginally below".

The press release further credited the measures taken by the SBP during the pandemic led to "significant liquidity and further lowered funding costs" for businesses and households.

"Together, these monetary measures have injected an estimated stimulus of Rs. 1.58 trillion, or about 3.8 percent of GDP, in the cash flow of businesses and households," it said.

'Economic recovery uneven across industries'

Acknowledging that the autosales, cement dispatches, POL sales, and electricity consumption and other indicators reflected an encouraging pickup, "the economic recovery remains uneven across industries", adding that the hospitality and service sectors were lagging to pre-Corona levels.

The SBP said that growth was expected to rise to slightly above 2% for FY21 from the previous low of -0.4%. The bank said that recovery is expected to be driven by manufacturing-related activities and construction, which are being supported by various financial policies from SBP including the Temporary Economic Refinance Facility and the government’s incentives for the housing and construction sectors.

The press release stated that on the downside, a second wave of the pandemic was expected in Pakistan's export markets — the US and Europe — during the winter, which could hamper economic activity.

The bank talked about how Pakistan's foreign exchange reserves had risen to its pre-coronavirus level due to surplus in the current account brought about by many factors.

"Remittances rose to a record monthly high in July and have topped US$ 2 billion for the last three months. By supporting the current account, which swung into a surplus in July, these developments have helped to restore SBP’s foreign exchange reserves to their pre-pandemic level of around US$ 12.8 billion. As a result, Pakistan’s reserve adequacy is now back above the important global benchmark of 3 months of import cover. Looking ahead, the current account deficit is expected to remain bounded at around 2% of GDP. This, together with expected private and official flows, should continue to keep Pakistan’s external position stable in FY21."

Earlier, the central bank had announced on Twitter that the SBP’s Monetary Policy Committee (MPC) is meeting today to discuss the country's monetary policy for the next two months.

“Governor SBP Dr Reza Baqir will announce the decision today at 5pm and SBP will tweet the decision at the same time,” said the SBP.

The committee, in its last meeting, had reduced interest rates by 625 basis points to 7% between March and June to support the economic growth in response to COVID-19 challenges.

The announcement on a new rate was expected in August but was deferred till September.

Analysts forecast no changes in policy

Last week, analysts told The News that the central bank may keep the interest rate unchanged in the upcoming monetary policy after delivering 625 basis points in a rate cut in a short span as inflation has crossed its lower range of 7%.

A study by Topline Research showed that more than 70% of respondents in a survey expected the rate to remain unchanged. It also said that only 20% of market participants voted for a rate cut.

“We anticipate the central bank to maintain a status quo and keep interest rates unchanged at 7%,” Topline Research said in a report. “Our stance is based on the initial phase of economic recovery incentivising low-interest rates, controlled external accounts, and benign near-term inflation outlook.”

“I believe SBP will take a back seat for now,” said Atif Zafar, an analyst at Topline Securities told the English daily.

“Given the current negative real interest rate, and higher than projected inflation, we expect the SBP to adopt the wait and watch approach,” said Muzzammil Aslam, the CEO of Tangent Capital Advisors told The News.

“SBP will keep its focus on growth and will work on reviving the economy to its potential.”

Saad Hashemy, executive director at BMA Capital said some are expecting a cut of up to 50 basis points.

They are expecting downward inflation in the coming few months, stable rupee and likelihood of international oil prices to remain stable at the current low levels for the foreseeable future.

KASB Research expected monetary tightening to begin from March next year onwards once Pakistan’s economy stabilises and economic activity normalises to pre-COVID levels.

“Inflationary pressures are expected to pick pace from March and Pakistan,” the brokerage said. “We believe interest rates will peak around 8.5% by the end of FY2020.”