- Central bank governor says will first look at the effects of the tightening that we have already done
The State Bank of Pakistan (SBP) will take a "pause" in its interest rate hikes to sustain economic recovery after raising policy rate by 275 basis points since September, its governor Dr Reza Baqir has said.
Talking to Yvonne Man and Rishaad Salamat on 'Bloomberg Markets: Asia', Dr Baqir discussed monetary policy and outlook for the economy.
“We don’t want to be late in trying to ensure that inflation expectations remain anchored and therefore, we have raised rates by accumulative 275bps since September. We have also indicated in our Monetary Policy Statement as forward guidance that now we are going to take a pause.
“We are going to take a pause to first look at the effects of the tightening that we have already done, and then we will consider what monetary policy settings should be afterwards.
“Fiscal policy has been very complimentary and is also withdrawing stimulus so a coordinated macroeconomic response, we think, will be number one to sustain recovery and keep inflation broadly in check.”
The statement comes after the central bank raised its key rate for a third consecutive meeting, taking the policy rate to 9.75%. The hike comes in tandem with high inflation readings that clocked in at 11.5% in November.
Meanwhile, Baqir said that economic growth in Pakistan remains ‘quite brisk’. “We expect to see economy to grow 5% this fiscal year. This comes on the back of the 4% growth achieved the previous year,” Baqir said.
Citing improved auto sales, growth in textile exports and tax collection, Baqir said that the economy is "growing quite well".
“The global development including recoveries around the world and supply chain disruptions have caused a sharp hike in global commodity prices, which has pushed up our current account deficit as well as inflation in Pakistan,” SBP chief said.
Baqir estimated 60-70% increase in the country’s CAD due to the global commodity prices.
Highlighting rupee devaluation against the US dollar, the SBP chief was of the view that the measures taken will dwindle pressure on the rupee once demand drops.
“The recent weakening of the rupee, which is about 10% since this calendar year, overstates the extent of the weakening because we transitioned from a fixed exchange rate to a market-based exchange rate in June of 2019. Year to date on average the rupee is around 162, and this is about the same level as last year from January to December.
“Secondly, a market-based exchange rate has served as a good shock absorber and has actually allowed the central bank to build reserves, and that’s what matters when you are looking at the outlook of the currency,” said Baqir, adding that Pakistan’s reserves have increased from $7 billion in June of 2019 to over $19 billion at present.
“We expect that as the combined effort of our policies takes effect the pressure on the rupee will abate as domestic demand moderates.”
Cumulatively, the rupee has depreciated over 11% CYTD and 13% on a FYTD basis against the US dollar.