Wednesday May 25, 2022

Monetary policy: SBP leaves policy rate on hold at 9.75%

State Bank of Pakistan keeps interest rate unchanged in line with market expectations

By Web Desk
January 24, 2022

State Bank of Pakistan Governor Reza Baqir addressing a press conference on January 24, 2022. — YouTube screengrab
State Bank of Pakistan Governor Reza Baqir addressing a press conference on January 24, 2022. — YouTube screengrab

KARACHI: State Bank of Pakistan (SBP) Governor Reza Baqir announced Monday that the monetary policy has been maintained at 9.75% for the next two months — in line with market expectations.

The central bank stated that in reaching its decision, the monetary policy committee (MPC) considered key trends and prospects in the real, external and fiscal sectors, and the resulting outlook for monetary conditions and inflation.

In a statement issued after the meeting, the SBP added that looking ahead, and against the backdrop of the developments that have improved the inflation outlook, the MPC was of the view that current real interest rates on a forward-looking basis are appropriate to guide inflation to the medium-term range of 5-7%, support growth, and maintain external stability. 

Hinting towards the next MPC meeting scheduled to be held on March 8, the central bank said: "The MPC will continue to carefully monitor developments affecting medium-term prospects for inflation, financial stability, and growth."

"If future data outturns require a fine-tuning of monetary policy settings, the MPC expected that any change would be relatively modest," it said.

This was the first monetary policy committee (MPC) meeting of the calendar year 2022. According to traditional practice, the central bank revises its monetary policy rate up or down or keeps it unchanged over the inflation reading and economic activities.

For example, low inflation mainly leads to a reduction in the monetary policy rate to ramp up economic activities and vice versa. Meanwhile, the rate is left unchanged at a higher level to tame inflation or on the lower side to support economic growth.

Financial pundits had anticipated no change in the policy rate as the SBP strongly hinted in monetary policy statements for December 2021 that it might maintain the rate at the current level of 9.75% to analyse the effects of the tightening already done.

The SBP had increased the key policy rate by a cumulative 275 basis points from September to December 2021 to 9.75% to control the rising inflation and narrow the widening current account deficit, while economic activities remain healthy.

It is pertinent to mention here that an interest rate is a tool available with the central bank to control inflation, do away with the unnecessary rupee movement and give a direction to the national economy.

'Inflation rate to decline next year'

Baqir said that the present inflation rate — which clocked in at 12.3% in December 2021 — is high; however, this will decline next year.

“Inflation is expected to rise in the short term but it will gradually stabilise,” Baqir said, adding that the aim of the central bank’s policies is to keep the inflation rate within a range of 5-7%.

Baqir further added that the SBP hopes to reduce inflation in the country, explaining that when inflation reduces, real interest rates would also decline.

Shedding light on the reason behind the soaring prices of commodities in the local market, he said that prices are temporarily high because of surging prices in the international market.

It is pertinent to mention here that the MPC, in its statement, had noted that since the last meeting on December 14, 2021, several developments suggest that these "demands-moderating measures are gaining traction and have improved the outlook for inflation.”

“Recent economic growth indicators are appropriately moderating to a more sustainable pace. While year-on-year headline inflation is high and will likely remain so in the near term due to base effects and energy prices, the momentum in inflation has slowed with month-on-month inflation flat in December compared to a significant rise of 3% in November,” it said.