In line with market expectations, the State Bank of Pakistan (SBP) on Friday maintained the status quo and left the benchmark interest rate unchanged at 7 per cent for the next two months.
The SBP held its policy rate unchanged, citing the need to support financial stability and economic recovery from the Covid-19 pandemic. The economy has continued to recover and business sentiment has further improved since the last policy announcement in March.
“Since its last meeting in March, the MPC (Monetary Policy Committee) was encouraged by the further upward revision in the FY21 growth forecast to 3.94 percent,” the bank said in a statement.
The SBP said while inflation had risen since January, a small number of energy and food items accounted for about three-fourths of this rise.
“Demand-side pressures are contained, wage growth is subdued and inflation expectations are reasonably anchored,” the central bank said in a tweet. Inflation rose to 11.1 percent last month.
It said the higher growth forecast confirmed the strength of the “broad-based economic rebound underway since the start of the fiscal year, on the back of targeted fiscal measures and aggressive monetary stimulus”.
“This positive momentum is expected to persist, translating into higher growth next year,” it added. However, the SBP said uncertainty remained due to the third wave of the coronavirus, suggesting the need for the monetary policy to remain supportive.
“The MPC was of the view that the current significantly accommodative stance of monetary policy remains appropriate to ensure the recovery becomes firmly entrenched and self-sustaining. This is especially so given the renewed heightened uncertainty created by the ongoing third wave of Covid in Pakistan and the fiscal consolidation expected this fiscal year,” it noted in its policy statement.
The committee observed that given the Covid-related uncertainties, “the cost of withdrawing monetary stimulus too soon exceeded that of withdrawing too late”.
“Looking ahead, in the absence of unforeseen circumstances, the MPC expects monetary policy to remain accommodative in the near term, and any adjustments in the policy rate to be measured and gradual to achieve mildly positive real interest rates over time,” the statement added.
Citing the latest National Income Accounts data, the SBP said the economy had “rebounded strongly” from last year’s severe Covid shock, led by services and industry. “The industrial sector is estimated to have grown 3.6 percent during FY21, driven by construction and large-scale manufacturing, especially the food, cement, textile and automobile sectors,” it added.
The strong rebound is also reflected in “exceptionally strong growth” recorded in multiple high-frequency indicators across all three quarters of the year, including sales of fast-moving consumer goods and POL products.
The agriculture sector, meanwhile, is estimated to have grown 2.8 percent, with the production of three important crops ― wheat, rice and maize ― rising to record highs and that of sugar cane to its second-highest ever level.