Policy rate to remain unchanged at 7pc, says SBP

State Bank of Pakistan (SBP) kept interest rates on hold at 7 per cent on Friday as it sought to balance economic headwinds from the Covid-19 pandemic with the need to curb inflation.

“The [Monetary Policy Committee] felt that the existing accommodative stance of monetary policy remained appropriate to support the nascent recovery while keeping inflation expectations well-anchored,” SBP said in a statement.

It is the third time that the central bank has kept its main policy rate unchanged after cutting it by 625 basis points, down from 13.25pc, at the time the global pandemic hit its economy last February.

The bank also provided guidance that it planned to keep interest rates unchanged “in the near term” in the absence of “unforeseen developments”, adding that any changes to interest rates as the economy recovered would have to be “measured and gradual”.

The result, which was largely in line with analysts’ expectations, was in part due to some domestic economic improvement with the bank saying there were upside risks to the projected 2pc growth projected for the 2021 financial year, which ends in June.

The bank has also had to balance the need to provide stimulus throughout the coronavirus pandemic with tempering inflation.

Price hikes have hit consumers hard over the past year though inflation has eased since hitting a five-year high of more than 9pc late last year, with the country posting 8pc consumer price inflation in December.

The MPC noted, however, that “domestic recovery has gained some further traction” since the committee’s last meeting in November, 2020.

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.”

The MPC noted that “economic activity data and indicators of consumer and business sentiment have shown continued improvement” and while inflation rate may increase due to increase in utility prices, the rise would be transient.

“Inflation is still expected to fall within the previously announced range of 7-9pc for FY21 and trend toward the 5-7pc target range over the medium-term,” the statement read.

This time, due to “Covid related uncertainties” the MPC also issued a forward guidance “to facilitate policy predictability and decision-making by economic agents”, the statement said.

He said that the economic situation of Pakistan was much better than in June 2019, when Pakistan had signed an agreement with the International Monetary Fund (IMF).

Speaking about improvement in the current account, Baqir said in the press conference that the authorities had decided to make an “institutional change” which was to switch to a market-based exchange rate from a controlled one.

He said that there were questions and fears that transition may lead to sky rocketing dollar prices.

“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.

“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.”

He said that the market-based exchange rate system was put to the test by Covid-19, which wreaked havoc on the global economy.

“Not only our economy, but our flexible exchange rate, passed this test successfully” despite Covid, the governor told reporters.

He said that Pakistan’s foreign reserves had increased but denied that the rise was due to loans borrowed by the government.

“The net contribution of foreign borrowing was zero or in the negative. Meaning, this increase in reserves was not only seen in total reserves but also in net international reserves,” Baqir explained.