SBP keeps key policy rate unchanged at 7 percent

KARACHI: The monetary policy committee of the State Bank of Pakistan has decided to keep the key policy rate unchanged at 7 percent for next two months.

In an announcement on Monday, the MPC noted that since the last meeting in September, the domestic recovery has gradually gained traction, in line with expectations for growth of slightly above 2 percent in FY21, and business sentiment has improved further, said State Bank of Pakistan (SBP).

Nevertheless, there are risks to the outlook. The recent rise in Covid cases in Pakistan and many other countries presents considerable downside risks.

On the upside, while it could take some time to fully implement worldwide, there has been recent encouraging news on vaccine development.

On the inflation front, recent out-turns have been on the higher side, primarily due to increases in food prices. However, these supply-side pressures are likely to be temporary and average inflation is expected to fall within the previously announced range of 7-9 percent for FY21. Taken together, risks to the outlook for both growth and inflation appear balanced.

Given the broadly unchanged outlook for growth and inflation, the MPC viewed the existing stance of monetary policy as appropriate to support the nascent recovery while keeping inflation expectations well-anchored and maintaining financial stability, the SBP said.

The MPC noted that the lagged effects of the significant fiscal, monetary and credit stimulus injected during the pandemic should continue to shore up growth in coming quarters.

The SBP said that in reaching its decision, the MPC considered key trends and prospects in the real, external and fiscal sectors, and the resulting outlook for monetary conditions and inflation.

The central bank said that after falling sharply since January, headline inflation has remained close to 9 percent during the last two months, primarily driven by sharp increases in selected food items due to supply-side issues.

In contrast, core inflation has been relatively moderate and stable, in line with subdued underlying demand in the economy. In addition, recent SPI releases suggest a weakening in the momentum of food prices, as the government has taken various measures to address supply-side issues.

Over the next few months, these measures, together with favorable base effects and spare capacity in the economy should help contain inflation.

The latest results of SBP surveys also lend support to this assessment, with inflation expectations of both businesses and consumers remaining well-anchored. Taking into account higher than expected recent out-turns due to supply side factors and absence of demand side pressures on inflation, risks to the inflation outlook are balanced.

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