State Bank of Pakistan announces new policy rate for the next quarter

State Bank of Pakistan announces new policy rate for the next quarter

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

The MPC noted that since the last meeting in November, the domestic recovery gained some further traction. Most economic activity data and indicators of consumer and business sentiment have shown continued improvement.

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

SBP prioritizes growth over temporary inflationary shocks. Capacities are not fully utilized. No panic in currency markets is expected.

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

While utility tariff increases may cause an uptick in inflation, this is likely to be transient given excess capacity in the economy and well-anchored inflation expectations. As a result, inflation is still expected to fall within the previously announced range of 7-9 percent for FY21 and trend toward the 5-7 percent target range over the medium-term, it added.

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

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

With the inflation outlook relatively benign aside from the possibility of temporary supply-side shocks, the MPC felt that the existing accommodative stance of monetary policy remained appropriate to support the nascent recovery while keeping inflation expectations well-anchored and maintaining financial stability.

While noting these favorable growth and inflation developments, the MPC also stressed that considerable uncertainty remains around the outlook. The trajectory of the COVID pandemic is difficult to predict, given the still-elevated global cases, the emergence of new strains, and lingering uncertainties about the roll-out of vaccines worldwide. Such external shocks could slow the recovery.

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

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

In reaching its decision, the MPC considered key trends and prospects in the real, external, and financial sectors and the resulting outlook for monetary 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 and 14.5 percent (y/y) in November. The manufacturing recovery is also becoming more broad-based, with 12 out of 15 subsectors registering positive growth in 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 percent during the same period last year.

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