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After 15 months, SBP increases policy rate by 25bps to 7.25%
The State Bank of Pakistan (SBP) on Monday announced an increase of 25 basis points in its benchmark policy rate in a bid to control soaring inflation that has affected the entire economy. After the increase, first in last 15 months, the benchmark policy rate now stands at 7.25 per cent, which will be effective […]
The State Bank of Pakistan (SBP) on Monday announced an increase of 25 basis points in its benchmark policy rate in a bid to control soaring inflation that has affected the entire economy.
After the increase, first in last 15 months, the benchmark policy rate now stands at 7.25 per cent, which will be effective for the next two months starting October 1, 2021. “Since its last meeting in July, the Monetary Policy Committee (MPC) noted that the pace of the economic recovery has exceeded expectations,” the SBP said in a statement, adding that the robust recovery in domestic demand, coupled with higher international commodity prices, was leading to a strong pick-up in imports and a rise in the current account deficit.
The SBP had reduced the policy rate on March 17 last year for the first time in four years, slashing it by 75 bps to 12.50pc, citing a declining inflationary pressure and a need to sustain the economy that was hit by the coronavirus crisis. Exactly one week later, the central bank had again slashed rates by 150 basis points to 11pc on March 24. Later in April 2020, the SBP had slashed the country’s policy rate for another time by 200 points to 9pc, before further reducing it to 7pc in June.
“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,” the SBP said. “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,” it read.
The statement added that 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.
The central bank said that in line with a shift in the economic outlook, the monetary policy committee (MPC) was of the view that the priority of monetary policy also needed to gradually pivot from catalysing the recovery after the COVID-19 shock toward sustaining it. “As foreshadowed in previous monetary policy statements, the MPC noted that this rebalancing would be best achieved by gradually tapering the significant monetary stimulus provided over the last 18 months,” it said, adding that 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 was appropriate for other adjustment tools, including interest rates, to also play their due role.
In its forward guidance for the next MPS scheduled for November 26, 2021, the SBP said, R20;The MPC noted that the stance of monetary policy is still appropriately supportive of growth, with real interest rates remaining negative on a forward-looking basis.” “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,” the statement read.
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