The State Bank of Pakistan (SBP) has decided to keep the policy rateunchanged at 7 percent. This was revealed by Governor State Bank ofPakistan (SBP), Dr. Reza Baqir, in a press conference today.

The MPC noted that since the last meeting in November, the domesticrecovery gained some further traction. Most economic activity data andindicators of consumer and business sentiment have shown continuedimprovement.

A.A.H Soomro, Managing Director at Khadim Ali Shah Bukhari Securities, toldProPakistani,

SBP prioritizes growth over temporary inflationary shocks. Capacities arenot fully utilized. No panic in currency markets is expected.

“As a result, there are upside risks to the current growth projection ofslightly above 2 percent in FY21. On the inflation front, recent out-turnsare also encouraging, suggesting a waning of supply-side price pressuresfrom food and still-benign core inflation,” read the official statementreleased by the SBP.

While utility tariff increases may cause an uptick in inflation, this islikely to be transient given excess capacity in the economy andwell-anchored inflation expectations. As a result, inflation is stillexpected to fall within the previously announced range of 7-9 percent forFY21 and trend toward the 5-7 percent target range over the medium-term, itadded.

CEO of the financial advisory Alpha Beta Core, Khurram Schezad, said

Giving direction on rates is a good step towards making a better forecastand help businesses and markets for better planning and decision making

With the inflation outlook relatively benign aside from the possibility oftemporary supply-side shocks, the MPC felt that the existing accommodativestance of monetary policy remained appropriate to support the nascentrecovery while keeping inflation expectations well-anchored and maintainingfinancial stability.

While noting these favorable growth and inflation developments, the MPCalso stressed that considerable uncertainty remains around the outlook. Thetrajectory of the COVID pandemic is difficult to predict, given thestill-elevated global cases, the emergence of new strains, and lingeringuncertainties about the roll-out of vaccines worldwide. Such externalshocks could slow the recovery.

In light of such COVID-related uncertainties, the MPC considered itappropriate to provide some forward guidance on monetary policy tofacilitate policy predictability and decision-making by economic agents. Inthe absence of unforeseen developments, the MPC expects monetary policysettings to remain unchanged in the near term.

As the recovery becomes more durable and the economy returns to fullcapacity, the MPC expects any adjustments in the policy rate to be measuredand gradual to achieve mildly positive real interest rates.

In reaching its decision, the MPC considered key trends and prospects inthe real, external, and financial sectors and the resulting outlook formonetary conditions and inflation.Real sector

The economic recovery underway since July has strengthened in recent months.

Large-scale manufacturing (LSM) grew by 7.4 percent (y/y) in October and14.5 percent (y/y) in November. The manufacturing recovery is also becomingmore broad-based, with 12 out of 15 subsectors registering positive growthin November and employment beginning to recover. So far, this fiscal year,LSM has grown by 7.4 percent (y/y), against a contraction of 5.3 percentduring the same period last year.

Nevertheless, the level of manufacturing activity generally remainedbelow-average levels in FY19, pointing to continued spare capacity in theeconomy. On the demand side, cement sales remain strong on the back ofrising construction activity. POL sales are at two-year highs, andautomobile sales are also rising in both urban (motorcars) and rural(tractors) markets. In agriculture, the cotton output is likely to declinemore than expected based on the latest production estimates, read thestatement.