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Business & Finance

SBP keeps interest rate unchanged at 7%

  • Announcement largely in line with market expectations * The MPC of the central bank was of the view that positive recovery momentum is expected to persist, translating into higher growth next year.
28 May, 2021

The State Bank of Pakistan (SBP) Monetary Policy Committee (MPC) has kept the key interest rate at 7% for the next two months.

Friday’s MPC meeting was the first after the central bank’s announcement of a half-yearly schedule on a rolling basis aimed at making the process of monetary policy formulation more transparent.

The MPC, encouraged by the further upward revision in the FY21 growth forecast to 3.94 percent, noted that the forecast confirms 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.

The MPC of the central bank was of the view that this positive momentum is expected to persist, translating into higher growth next year. However, uncertainty remains due to the third COVID wave, suggesting a need for monetary policy to remain supportive.

The central bank said that in the absence of unforeseen circumstances, MPC expects monetary policy to remain accommodating in the near term and any adjustments in the policy rate will be measured and gradual to achieve mildly positive real interest rates over time.

The MPC noted that the inflation rate rose to 11.1 percent (y/y) in April, due to the lingering impact of this February’s electricity tariff increase as well as a pick-up in month-on-month food prices, partly driven by the Ramzan season.

It said that as the economy gathers further momentum, it will be important to ensure that food price pressures are reversed through successful implementation of administrative measures to keep second-round effects in check.

Highlighting the latest figures released by the National Income Accounts, MPC said the data confirm that the economy has rebounded strongly from last year’s severe Covid-shock, led by services and industry sectors.

It added that the current economic recovery has been supported by proactive policies of the government and the central bank since the Covid-shock.

The MPC noted that, unlike previous growth upturns in Pakistan, the current economic recovery has been achieved without compromising external stability. Through the first ten months of FY21, the current account has remained in surplus for the first time in 17 years. The uptick in imports in recent months has been largely offset by record remittances, which rose to all-time highs in April.

In addition, exports have shown significant grown of almost 14 percent (y/y) so far this year, noted MPC.

The policy rate was last changed in June 2020, when the MPC reduced it by 100 basis points to 7 percent.

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