SBP to Maintain the Interest Rate at 7%

The central bank of Pakistan has decided to maintain the benchmark interest rate at 7% for the months of December and January. This decision has been made in accordance with market expectations and to ensure support for economic activities. 

This decision could not have come at a better time as there has been a spike in coronavirus cases in the country. The increase in the number of people infected has caused the economy to be at a risk of losing its growth momentum. 

However, the country has gradually and steadily been recovering its economy and meeting predictions for growth of more than 2%. This comeback has occurred in this fiscal year and has significantly improved business sentiment. 

On Monday, the State Bank of Pakistan (SBP) issued its bi-monthly Monetary Policy Statement (MPS). In it, they acknowledged that there are certain risks associated with the rise in coronavirus cases. They also added that even though it may take a substantial amount of time to implement across the world, there has been positive news on the development of vaccines. 

The statement also expressed hope on the SBP’s part, who expect to see a shore up growth in the upcoming quarters. They believe that this is possible due to the implementation of their significant monetary, fiscal, and credit stimulus injection, to help ease the damaging effects of the pandemic. It is the central bank’s job to revise the benchmark interest rate to try and control inflation and help expand economic activities. 

The monetary policy committee (MPC) of the SBP talked about the widely unchanged outlook for inflation and growth. According to them, the current stance of the monetary policy is appropriate to encourage recovery. They said that it also keeps inflation expectations anchored and maintains financial stability. 

Meanwhile, the inflation reading remains elevated at 9%, as it has in the months of September and October. It is the belief of the SBP that this reading will continue to stand still at 9% or land somewhere between 7 and 9%, for the current fiscal year. 

In the past couple of months, inflation had increased mainly due to an increase in the prices of food. This was attributable directly to the low production of agricultural products as compared to domestic demand. The statement of the MPC dismissed this occurrence saying that these supply-side pressures are likely to be only temporary. 

The central bank further observed that economic activities had been gathering momentum as of late, especially in the middle of the coronavirus pandemic. Recent data had revealed that the economic recovery of the country had broadened and strengthened since the month of July. The credit for this improvement was given to the manufacturing and construction industries. 

In the first quarter of the FY21, the sales of fast-moving consumer goods (FMCGs) had shown a positive trend. Even the average sales volume of automobiles and petroleum oil products had surpassed the number of FY20. Additionally, cement sales had been at an all-time high from the months of July till September.