Interest rates to remain at 7pc, says SBP governor

"The MPC's inflation estimates are 7-9 per cent," he said but added a warning that a temporary rise in the prices of food and beverages, as well as electricity, were likely.

State Bank of Pakistan (SBP) Governor Dr Reza Baqir announced that the Monetary Policy Committee (MPC) has decided to keep the interest rate at 7 per cent.

The above was decided in a meeting of the committee on January 22, 2021, wherein the MPC noted that the domestic recovery has gained some further traction since the last meeting in November. Most economic activity data and indicators of consumer and business sentiment have shown continued improvement, the committee observed.

As a result, there are upside risks to the current growth projection of slightly above 2 per cent in FY21.

SBP Governor Reza Baqir, in a press conference after the committee’s meeting, said that in the “near future […] interest rate will remain the same and if, in the future, there is a change, it wouldn’t be like [in the past] when the interest rate would see a sudden and drastic change. The change would be [introduced] in an orderly manner.”

In regard to inflation, recent out-turns are reportedly encouraging and suggest a waning of supply-side price pressures from food and still-benign core inflation. While utility tariff increases may cause an uptick in inflation, this is likely to be transient given excess capacity in the economy and inflation expectations.

“The MPC’s inflation estimates are 7-9 per cent,” he said but added a warning that a temporary rise in the prices of food and beverages, as well as electricity, were likely.

Dr Reza Baqir also noted that the production capacity was not being fully utilised.

“The MPC has also given a direction to the future and the SBP has provided guidance for the future as well this time.

Inflation is still expected to fall within the aforementioned range in the current fiscal year and a further trend toward the 5-7 per cent target range over the medium-term.

With this in mind, the MPC felt that the existing accommodative stance of monetary policy was appropriate to support the nascent recovery while keeping inflation expectations well-anchored and maintaining financial stability.

Earlier, in a bid to deal with the fallout from the Covid pandemic, the central bank slashed the policy rate by a significant 625 basis points during the period of March and June 2020.

On the other hand, the committee also stressed that there is still considerable uncertainty remains regarding this outlook. It pointed out that the still-elevated global cases, the emergence of new strains, and lingering uncertainties about the roll-out of vaccines worldwide have made the trajectory of the Covid-19 pandemic is difficult to predict.

Such external shocks could slow the recovery, the MPC warned. However, in the absence of unforeseen developments, the MPC expects monetary policy settings to remain unchanged in the short-term.

“The [exchange] rate was at Rs162-163 and we left it [to the free market], it became stable. [In] those nine months before Covid, it strengthened and came down from Rs163 to Rs153-154. Which means that the improvement in the current account was because of a good reason [which was] that the exchange rate system was made more flexible,” Baqir said during the presser.

“It’s basic advantage is that, in future, if there is a deficit in the balance of payments, instead of adding reserves and balancing it artificially, exchange rate will play the role of a shock absorber.”

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