The State Bank of Pakistan (SBP) on Monday increased the benchmark interest rate by 25 basis points to 7.25 percent for the next two months, after keeping the policy rate unchanged six times in a row and the first such increase since June 2020.
A statement issued after the Monetary Policy Committee (MPC) meeting, the central bank said the decision to increase the interest rate to 7.25 percent was taken under the chairmanship of SBP Governor Dr Reza Baqir.
Since its last meeting in July, the MPC noted that the pace of the economic recovery has exceeded expectations. This robust recovery in domestic demand, coupled with higher international commodity prices, is leading to a strong pick-up in imports and a rise in the current account deficit. While year-on-year inflation has declined since June, rising demand pressures together with higher imported inflation could begin to manifest in inflation readings later in the fiscal year, said the statement.
With growing signs that the latest Covid wave in Pakistan remains contained, continued progress in vaccination, and overall deft management of the pandemic by the government, the economic recovery now appears less vulnerable to pandemic-related uncertainty. As a result, at this more mature stage of the recovery, a greater emphasis is needed on ensuring the appropriate policy mix to protect the longevity of growth, keep inflation expectations anchored, and slow the growth in the current account deficit, said the SBP.
The MPC noted that over the last few months the burden of adjusting to the rising current account deficit had fallen primarily on the exchange rate and it is appropriate for other adjustment tools, including interest rates, to also play their due role.
Looking ahead, in the absence of unforeseen circumstances, the MPC expects monetary policy to remain accommodative in the near term, with possible further gradual tapering of stimulus to achieve mildly positive real interest rates over time. In reaching its decision, the MPC considered key trends and prospects in the real, external and fiscal sectors, and the resulting outlook for monetary conditions and inflation, said the statement.
The interest rate rise caught analysts off guard, many of whom were expecting the central bank to leave the rate unchanged. In its previous policy review on July 27, the central bank had kept the policy rate unchanged at 7% for the sixth time in a row during a 13-month period.
The SBP had aggressively slashed the benchmark interest rate by 625 basis points to 7% from March to June 2020 to minimise the impacts of Covid-19 on the economy. Since then, the SBP has maintained a status quo.
The interest rate is a tool available with the central bank to control inflation, regulate unnecessary rupee movement and give direction to the national economy. Analysts believe that the central bank of Pakistan will announce an increase of 25-50 basis points in its next MPS scheduled for November 26, 2021.
On June 25, 2020, the SBP had decided to slash the country’s policy rate by 100 points to 7 percent.