KARACHI: Pakistan central bank is scheduled to review policy rate on July 07, 2022 and analysts believed an increase of up to 100 basis points due to surge in inflation.
A report of K Trade Research issued on Tuesday, stated that the State Bank of Pakistan (SBP) scheduled its monetary policy meeting for July 07, 2022 to set policy rates for the next six weeks.
“Given the recent inflationary wave, we anticipate another 75-100 basis points hike in the policy rate to 14.5-14.75 per cent,” according to the analysts.
The SBP in its monetary policy announcements on April 7, 2022 and May 23, 2022 has already increase policy rate by 250 basis points and 150 basis points, respectively. The central bank increased the policy rate by 400 basis points from 9.75 per cent to 13.75 per cent in just last two announcements.
Inflation for June 2022 touched 13-year high levels of 21.3 per cent, driven by the reversal of petroleum and electricity subsidies. Real interest rates for the month fell to nearly -8.0 per cent from 0 per cent in May 2022.
Moreover, core Non-Food Non-Energy (NFNE) inflation has entered double-digits (12.3 per cent in Jun 2022), indicating strong underlying demand in the economy.
The analysts project inflation to average around 16.0 per cent in current fiscal eyar 2022/2023, given the re-implementation of taxes in the petroleum pricing structure.
Moreover, elevated prices of both RLNG and Coal will further push electricity prices to higher levels. Notably, electricity production cost from imported coal (20 per cent of power mix) is up nearly 4x YoY, and electricity production cost from RLNG (20 per cent of power mix) is up 2.5x YoY.
On a forward-looking basis, we estimate real interest rates stand at -2.3 per cent, strengthening our case for another policy rate hike.
External imbalances remain elevated as the trade deficit for Jun 2022 stood at USD 4.8 billion, driven by elevated energy and commodity prices. Moreover, material concerns have arisen over the potential sustainability of exports, given the economic slowdown in key markets. Notably, textile players are anticipating a 15-20 per cent reduction in volumetric export off-take in 2022/2023, potentially exacerbating the external imbalances.
The analysts believe a tight monetary stance over the medium is necessary to ensure Pakistan’s economy weathers the global inflationary wave and the ensuing external and fiscal imbalances.
The short tenor secondary market yields have crossed 15.0 per cent and the 3-month treasury-bill cut-off yields touched 15.23 per cent in the latest auction, hinting at market expectations of another hike.
ISLAMABAD: The State Bank of Pakistan (SBP) has increased the key policy rate by 6.75 per cent during September 2021 to May 2022, according to Economic Survey of Pakistan 2021/2022 released on Thursday.
The survey stated that Pakistan’s economy has witnessed a V-shaped recovery in 2020-2021 after witnessing a contraction of 0.9 percent in FY2020.
After the COVID outbreak, the policy rate was reduced by 6.25 per cent within short span of less than three months, during March-June 2020. This was the largest policy rate cut in emerging market economies.
During FY2021, the SBP maintained an accommodative monetary policy stance, by keeping the policy rate unchanged at 7.0 percent throughout FY2021.
Besides, SBP provided liquidity and regulatory support to businesses and households during the challenging times. The economic policy was implemented with a prudent mix which supported the economic recovery without putting any pressure on macroeconomic imbalances.
With heightened uncertainty due to COVID-19, the Monetary Policy Committee for the first time considered it appropriate to provide some forward guidance on monetary policy in its January 2021 meeting, to facilitate policy predictability and decision making by economic agents.
In the absence of unforeseen developments, the Monetary Policy Committee (MPC) expected monetary policy settings to remain unchanged in the near term.
Moreover, in the subsequent monetary policy decisions during FY2021, the MPC has maintained the policy rate of 7.0 percent to nurture the economic recovery.
At the end of first quarter FY2022, policy rate has increased by 25 basis points (bps) to 7.25 percent. The decision was primarily based on observation of excess aggregate demand and more than expected economic recovery as reflected by rising high import bill and increasing current account deficit.
The objective of monetary policy was shifted to ensuring the appropriate policy mix to protect the longevity of growth, keep inflation expectations anchored, and control the current account deficit.
In subsequent Monetary Policy decisions announced in November and December, 2021, policy rate was increased by 150 bps and 100 bps to 8.75 percent and 9.75 percent, respectively. The decision was made due to heightened risks associated with inflation and balances of payments, which stemmed from both global and domestic factors.
In Pakistan, high import prices have contributed to higher-than-expected inflation outturns. At the same time, there were also emerging signs of demand-side pressures on inflation from domestic administered prices.
In December, 2021 Monetary policy decision, MPC explained that the goal of mildly positive real interest rates was now close to being achieved. Looking ahead, the MPC expected monetary policy settings to remain broadly unchanged in the near-term.
Resultantly, policy rate has kept unchanged at 9.75 percent in two successive decisions held on January and March, 2022.
However, policy rate was increased by 250 bps to 12.25 percent from 9.75 percent in an unscheduled meeting on 07th April 2022, to address significant uncertainty amidst rising global commodity prices and domestic political situation. The inflation outlook had deteriorated and risks to external stability had increased for FY2022. Externally, futures market suggests that global commodity prices, including oil, are likely to remain elevated for longer and the Federal Reserve is likely to increase interest rates more quickly than previously anticipated, likely leading to a sharper tightening of global financial conditions.
Domestically, some macroeconomic indicators have deteriorated, as have SBP reserves as a result of debt repayment and political uncertainty.
In monetary policy decision held on 23rd May, 2022 the MPC decided to raise the policy rate by 150 basis points to 13.75 percent. The decision was based on outcome of provisional growth estimates for FY2022 more than target, shows excess aggregate demand, elevated external sector pressure and the higher inflation outlook due to domestic and international factors.
In addition to policy rate increase, the interest rates on EFS and LTFF loans are also being raised. The MPC has informed that in future, these rates will be linked to the policy rate and will adjust automatically, while continuing to remain below the policy rate in order to incentivize exports.
KARACHI: The State Bank of Pakistan (SBP) is scheduled to announce monetary policy on May 23, 2022 and may increase the key policy rate by 100 basis points to 13.25 per cent, analysts said on Tuesday.
According to the analysts at Arif Habib Limited, the monetary policy committee of SBP will convene on Monday (May 23rd, 2022) to announce the last scheduled monetary policy of 2021/2022.
They expect the central bank may increase the policy rate by 100 basis points to 13.25 per cent in the upcoming monetary policy statement.
To recall, in an emergency monetary policy meeting held on April 07, 2022, the SBP increased the benchmark policy rate by 250 basis points to 12.25 per cent.
The MPC stated that it believed that since the monetary policy meeting held in March 2022, the outlook for inflation had deteriorated and risks to external stability had risen.
Therefore, these developments necessitated a strong and proactive policy response.
To recall, headline inflation has remained in the double digits since November 2021 mainly on the back of uptick in food and energy prices.
This phenomenon still continues with headline number hitting almost two years high in April, clocking-in at 13.4 per cent with pressure mainly emanating from higher food and commodity prices.
In April’s MPS, SBP stated that the average inflation forecasts had been revised upwards to slightly above 11 per cent for fiscal year 2021/2022 before moderating in the next fiscal year.
Moreover, in the last policy (April 2022), SBP had termed its action of rate hike as ‘decisive’ and a timely measure to ensure that the goal of financial stability.
In addition, the Governor in post MPS (Analyst) Briefing had hinted at a ‘good news’ regarding IMF but conditional upon certain measures pending at government’s end.
The next round of meeting with the IMF starts from May 18th (source: news reports) so they expect government to soon consider rolling back of fiscal relief measures in order to get seventh review through, successfully.
However, this step of government is most likely to further augment inflationary pressure hence, SBP might want to act proactively and consider rate hike in the upcoming policy.
KARACHI: Federation of Pakistan Chambers of Commerce and Industry (FPCCI) on Saturday said that the recent increase in interest rate will result in disaster for the economy.
Irfan Iqbal Sheikh, President FPCCI, has expressed his profound disappointment and concerns over an unexpected and massive hike in the key policy rate, i.e. 250 bps by the Monetary Policy Committee (MPC) of the State Bank of Pakistan.
He said that the business, industry and trade community is shocked; and, clueless at the same time on how to cope with its fallout on economic activities, viability of doing business in Pakistan and inevitable adverse impacts on exports – in the absence of any governmental support.
President FPCCI added that a comparative analysis of the interest rates in Pakistan and the regional countries also show a big difference to Pakistan’s disadvantage; namely, Malaysia is at 2 percent China is at 3.7 percent; India is at 4 percent and Bangladesh is at 5 percent. He emphasized that if the interest and export refinancing rates are not decreased drastically in Pakistan, we will not be able to compete with the regional countries as well.
Irfan Iqbal Sheikh explained that the current tide of the inflation had nothing to do with the policy rate of SBP; but, it was due to the political uncertainty and lack of any direction in economic policies due to it.
Additionally, he added, that the inflation in Pakistan has been due to supply-side disruptions and again had nothing to do with the interest rate.
President FPCCI elaborated that it was business community’s genuine demand, even before the recent interest rate raise, that the policy rate should be gradually brought down from 9.75 percent to ensure availability of capital to businesses at lower and affordable rates. Contrary to what was needed, the interest rate has now been hiked to 12.25 percent; which will put a halt to the economic and commercial activities in the country.
Outlining three factors, Irfan Iqbal Sheikh said that volatile rupee-dollar parity, uncertainty in political & economic environment and interest rate hike will totally crush the SMEs; as cost of doing of doing business, ease of doing business, access to capital, access to foreign exchange and remaining profitable will all be next to impossible for SMEs.
Irfan Iqbal Sheikh said if the authorities do not interfere immediately, there will be a lot of bankruptcies, many export orders would not be fulfilled, huge loss of employment opportunities; and loss of tax revenue will follow. He has called upon the authorities to instantaneously start a consultative process with all the stakeholders to find a workable way out of the current crises.
KARACHI: Karachi Chamber of Commerce and Industry (KCCI) has urged the central bank to immediately withdraw the rise in the key policy rate of 2.5 per cent.
Chairman Businessmen Group (BMG) Zubair Motiwala and President Karachi Chamber of Commerce & Industry (KCCI) Muhammad Idrees, while highly criticizing the State Bank’s move to exorbitantly raise the interest rate by 2.5 percent to 12.5 percent in an emergent meeting, urged Governor SBP to immediately revisit and withdraw this irrational increase as it would prove disastrous for the economy, exports and the industries.
In a joint statement issued, Chairman BMG and President KCCI stated that the entire business & industrial community was in a state of shock to see SBP’s anti-business, anti-economy and anti-exports move which has been taken particularly in a situation when the country’s economy was not so bad. State Bank’s autonomy doesn’t mean that it was free to take such a harsh step overnight which has never happened in 25 years’ history.
It was highly unfair to abruptly and exorbitantly raise the interest rates without bothering to hold consultation with the stakeholders, they said, adding that the Karachi Chamber, from time to time, requested Governor State Bank to visit KCCI so that numerous monetary issues and central bank’s policies affecting businesses could be discussed in detail but, unfortunately, Governor SBP has no time to discuss some of the most pressing issues being suffered by the business community of Karachi.
They noted that last month, Pakistan’s exports recorded an increase of 29.1 percent on Month-on-Month (MoM) basis as compared to last year which clearly indicates that the export sector was performing very well but now, the increase in interest rate would have a deep negative impact on the export performance. It will be completely disastrous for the industries and future investments as nobody would come forward to set up any industry due to exorbitant interest rate and the high cost of doing business which was going to bring the survival of businesses at stake, they cautioned.
Chairman BMG and President KCCI said that the extortionate increase in the interest rate seems like an attempt to completely shut down the industrial and export activities. Is the State Bank intending to completely block the desperately needed foreign exchange being earned through exports and bring Pakistan’s economy at par with the Sri Lankan economy, they asked and advised the SBP to compare Pakistan’s excessive interest rate with the global interest rates which, we fear, would cool down the economic activities.
They said that the decision to increase the interest rate has been taken to contain inflation but keeping in view the ground realities and the overall high cost of doing business, the business and industrial community firmly believes that enhanced interest rate would prove counter-productive by further nurturing the inflation.
Chairman BMG said, “As leader of the business community of Karachi, I fervently demand that the decision to raise the interest rate must be revisited which is purely not in the interest of the country hence it has to be taken back while the SBP must also hold consultations with the stakeholders prior to imposing such decision directly affecting the business and industrial activities.”
President KCCI said that the increase in dollar value was due to political turmoil, not because of poor economic performance which has not yet been suffered by impact of rising oil prices hence, the State Bank must refrain from creating more problems for the economy.
KARACHI: The State Bank of Pakistan (SBP) in an unscheduled meeting held on Thursday announced a sharp increase in key policy rate by 250 basis points to 12.25 per cent from 9.75 per cent for next two months.
The Monetary Policy Committee (MPC) is scheduled to be held on April 19, 2022. However, due to latest development in yield of treasure bills resulted in emergent meeting of the MPC.
The SBP in a statement said that the MPC noted that the above developments necessitated a strong and proactive policy response. Accordingly, the MPC decided at its emergency meeting today, to raise the policy rate by 250 basis points to 12.25 percent.
At its last meeting on 8th March 2022, the Monetary Policy Committee (MPC) noted in its statement the significant uncertainty around the outlook for international commodity prices and global financial conditions, which had been exacerbated by the Russia-Ukraine conflict. Given the unfolding situation, the MPC had highlighted that it “was prepared to meet earlier than the next scheduled MPC meeting in late April, if necessary, to take any needed timely and calibrated action to safeguard external and price stability.”
Since the last MPC meeting, the outlook for inflation has deteriorated and risks to external stability have risen. Externally, futures markets suggest that global commodity prices, including oil, are likely to remain elevated for longer and the Federal Reserve is likely to increase interest rates more quickly than previously anticipated, likely leading to a sharper tightening of global financial conditions. On the domestic front, the inflation out-turn in March surprised on the upside, with core inflation in both urban and rural areas also rising significantly.
While timely demand-moderating measures and strong exports and remittances saw the February current account deficit shrink to $0.5 billion, its lowest level this fiscal year, heightened domestic political uncertainty contributed to a 5 percent depreciation in the rupee and a sharp rise in domestic secondary market yields as well as Pakistan’s Eurobond yields and CDS spreads since the last MPC meeting.
In addition, there has been a decline in the SBP’s foreign exchange reserves largely due to debt repayments and government payments pertaining to settlement of an arbitration award related to a mining project. Some of this decline in reserves is expected to be reversed as official creditors renew their loans.
As a result of these developments, average inflation forecasts have been revised upwards to slightly above 11 percent in FY22 before moderating in FY23. The current account deficit is still expected to be around 4 percent of GDP in FY22. While the non-oil current account balance has continued to improve, the overall current account remains dependent on global commodity prices.
This increases forward-looking real interest rates (defined as the policy rate less expected inflation) to mildly positive territory. The MPC was of the view that this action would help to safeguard external and price stability. The MPC also noted that SBP is in the process of taking further actions to reduce pressures on inflation and the current account, namely an increase in the interest rate on the export refinance scheme (EFS) and widening the set of import items subject to cash margin requirements. These items are mostly finished goods including luxury items and exclude raw materials. The announcement of these measures is expected soon and will complement the action taken by the MPC on interest rates today.
Importantly, the MPC highlighted that Pakistan’s external financing needs in FY22 are fully met from identified sources. Looking ahead, the MPC noted that today’s decisive actions, together with a reduction in domestic political uncertainty and prudent fiscal policies, should help ensure that Pakistan’s robust economic recovery from Covid-19 remains sustainable.
He said that further increase in monetary policy by SBP to 9.75 per cent would result in more inflation.
President Salman Aslam said that the government was trying to control inflation by raising interest rates but in the current economic scenario this decision could not prove beneficial.
He suggested that the government should provide facilities and incentives to the export industry to increase the country’s exports and increase foreign exchange reserves, thus reducing the pressure on the rupee against the dollar.
President KATI said tightening monetary policy would freeze the economy, which would hurt the economy. The government-set growth target of 5 per cent is likely to be affected.
Salman Aslam appealed to the government to take strict measures to increase exports instead of tightening monetary policy. If imports are reduced then inflation can be brought down.
He said that the SBP’s move would make loans more expensive and would further increase inflation.
Salman Aslam said that Korangi industrial area has full potential to increase exports, if the government provides facilities then KATI can play its full role in increasing exports.
KARACHI: The State Bank of Pakistan (SBP) on Monday announced first increase in key policy rate by 25 basis points in past 25 months.
Previously, the SBP announced the increase in policy rate of 100 basis points to 13.25 per cent.
The SBP kept the policy rate unchanged at 13.25 per cent till March 17, 2020 when it decided to reduce the policy rate by 75 per cent to 12.50 per cent.
Due to coronavirus pandemic, the central bank brought down the policy rate to 7 per cent in short span of time and maintained at this level for the past many months. The SBP reduced the policy rate to 7 per cent in its announcement on June 25, 2020.
At its meeting on September 20, 2021, the Monetary Policy Committee (MPC) decided to raise the policy rate by 25 basis points to 7.25 percent.
Since its last meeting in July, the MPC noted that the pace of the economic recovery has exceeded expectations.
This robust recovery in domestic demand, coupled with higher international commodity prices, is leading to a strong pick-up in imports and a rise in the current account deficit.
While year-on-year inflation has declined since June, rising demand pressures together with higher imported inflation could begin to manifest in inflation readings later in the fiscal year.
With growing signs that the latest COVID wave in Pakistan remains contained, continued progress in vaccination, and overall deft management of the pandemic by the government, the economic recovery now appears less vulnerable to pandemic-related uncertainty.
As a result, at this more mature stage of the recovery, a greater emphasis is needed on ensuring the appropriate policy mix to protect the longevity of growth, keep inflation expectations anchored, and slow the growth in the current account deficit.
In line with this shift in the economic outlook, the MPC was of the view that the priority of monetary policy also needed to gradually pivot from catalyzing the recovery after the Covid shock toward sustaining it.
As foreshadowed in previous monetary policy statements, the MPC noted that this rebalancing would be best achieved by gradually tapering the significant monetary stimulus provided over the last 18 months.
The MPC noted that over the last few months the burden of adjusting to the rising current account deficit had fallen primarily on the exchange rate and it was appropriate for other adjustment tools, including interest rates, to also play their due role.
The MPC noted that the stance of monetary policy is still appropriately supportive of growth, with real interest rates remaining negative on a forward-looking basis. Looking ahead, in the absence of unforeseen circumstances, the MPC expects monetary policy to remain accommodative in the near term, with possible further gradual tapering of stimulus to achieve mildly positive real interest rates over time.
The pace of this possible further gradual tapering would be informed by updated information on the continued strength of demand growth and the stance of fiscal policy, amongst other factors.
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.
With a supportiveFY22 budget and accommodative monetary policy, most high-frequency domestic demand indicators such as automobiles, POL (petroleum, oil and lubricants) sales, cement sales and electricity generation continue to depict robust growth. This growth is mirrored in the strength of imports and tax collections.
LSM registered strong growth in June (18.5 percent (y/y)) before moderating in August to 2.2 percent (y/y), in line with typical seasonal patterns. The services sector is also rebounding strongly; latest Google Community Mobility Reports show that activity across grocery stores, restaurants, and shopping centers during July and August rose above pre-Covid levels. In agriculture, the decline in the area under cultivation of cotton is expected to be compensated by an increase in area for rice, maize, and sugarcane. Based on these trends, growth in FY22 is now expected toward the upper end of the forecast range of 4-5 percent, notwithstanding some greater uncertainty with respect to spillovers from the evolving situation in Afghanistan.
The current account deficit rose to $0.8 billion in July and $1.5 billion in August, reflecting both vigorous domestic demand and high global commodity prices. While remittances remained strong, growing by 10.4 percent (y/y) during July-August and exports also performed reasonably well (averaging $2.3 billion per month), they were outstripped by imports. In response, the rupee depreciated by 4.1 percent since the last MPC meeting. The MPC noted that many other currencies have also depreciated recently as expectations of tapering by the Federal Reserve have been brought forward.
The MPC noted that the flexible market-based exchange rate regime has performed well since its introduction in June 2019, including through the Covid shock. It has overseen a healthy modulation of the current account and supported a critical build-up in the country’s gross and net FX reserves despite external pressures. Under this regime, the SBP does not suppress an underlying trend in the exchange rate and any interventions are limited to address disorderly market conditions. Since its floatation, the rupee has moved in an orderly manner in both directions and has depreciated by only 4.8 percent to date, much less than many other emerging market currencies over the same period. Since the rupee was floated, SBP’s gross foreign exchange reserves have nearly tripled to a record $20 billion, while net international reserves have risen by nearly $16 billion between end-June 2019 and end-August 2021.
The MPC observed that while the flexible exchange rate has appropriately played its role as a shock absorber, it is important that its role be complemented by strong exports, targeted measures to curb non-essential imports, and appropriate macroeconomic policy settings to contain import growth.
In FY21, prudent management of the public finances facilitated fiscal consolidation for the second year in a row despite Covid, with the primary deficit declining by around ½ percentage points to 1.4 percent of GDP. This improvement largely stemmed from strong growth in tax and petroleum development levy (PDL) revenues, together with significant deceleration in non-interest expenditures. Following the seasonal end-year release of expenditure allocations, the fiscal impulse was strongly expansionary in the final quarter of FY21. In the first two months of FY22, FBR revenue grew by over 40 percent (y/y)while Federal PSDP releases rose to an all-time high for this period, equivalent to nearly 44 percent of their budgeted amount for the full year. It will be important to support tax revenue growth and carefully monitor outturns through the year to ensure the budget remains on track. Any unforeseen slippages in the fiscal stance would further bolster domestic demand, imports and inflation.
The MPC noted that accommodative financial conditions have provided significant support to the growth recovery since the start of FY21. Following historic cuts in the policy rate and the introduction of SBP Covid-related support packages, private sector credit grew by more than 11 percent during FY21, on the back of consumer loans (mainly auto finance and personal loans) followed by a broad-based expansion in credit for fixed investment and finally working capital loans. The MPC felt that some macro prudential tightening of consumer finance may also be appropriate to moderate demand growth as part of the move toward gradually normalizing monetary conditions.
Inflation fell from 9.7 percent (y/y) in June to 8.4 percent in both July and August. In addition to favorable base effects, this decline reflects continued deceleration in administered prices of energy due to the reduction in PDL and sales tax on petroleum products. Core inflation also fell in both urban and rural areas in August. Nevertheless, the momentum of prices remains relatively elevated, with month-on-month increases of 1.3 percent in July and 0.6 percent in August. In addition, inflation expectations of both households and businesses have drifted up and wage growth has picked up as the recovery has strengthened.
Looking ahead, the inflation outlook largely depends on the path of domestic demand and administered prices, notably fuel and electricity, as well as global commodity prices. The MPC will continue to carefully monitor developments affecting medium-term prospects for inflation, financial stability and growth and stands ready to respond appropriately.
KARACHI: The State Bank of Pakistan (SBP) on Monday kept the policy rate unchanged at 7 per cent for next two months. The SBP said that at its meeting on July 27, 2021, the Monetary Policy Committee (MPC) decided to maintain the policy rate at 7 percent.
KARACHI: The Monetary Policy Committee (MPC) on Friday decided to keep the key policy rate unchanged at 7 percent owing to improved GDP growth forecast to 3.94 percent and hope of further higher growth in the next fiscal year.
A statement issued by the State Bank of Pakistan (SBP) said that since its last meeting in March, the MPC was encouraged by the further upward revision in the FY21 growth forecast to 3.94 percent.
The MPC noted that this 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.
This positive momentum is expected to persist, translating into higher growth next year.
According to the SBP statement, the inflation rose to 11.1 percent (y/y) in April, propped up by the lingering impact of this February’s electricity tariff increase as well asa pick-up in month-on-month food prices, partly driven by the usual seasonality around Ramzan. The MPC noted that supply-shocks to food and energy still dominate, with a small number of energy and food items in the CPI basket accounting for about three-fourths of the rise in inflation since January.
The MPC also observed that although core inflation in urban areas has risen by around 1.5 percentage points during this period, available evidence suggests that demand-side pressures on inflation continue to be relatively contained.
This reflects the fact that despite the economic recovery, there is still some spare capacity following last year’s contraction. Second-round effects from the supply shocks are also not visibly apparent: price pressures are concentrated in a few items, wage growth is subdued keeping a cap on costs, and inflation expectations remain reasonably anchored. As previously forecast, the headline year-on-year inflation rate is likely to remain elevated in the coming months due to the recent electricity tariff hike, pushing the average for FY21 close to the upper end of the announced range of 7-9 percent. As supply shocks dissipate thereafter, inflation is expected to gradually fall toward the 5-7 percent target range over the medium-term.
In light of the foregoing considerations, the MPC was of the view that the current significantly accommodative stance of monetary policy remains appropriate to ensure the recovery becomes firmly entrenched and self-sustaining. This is especially so given the renewed heightened uncertainty created by the on-going third wave of Covid in Pakistan and the fiscal consolidation expected this fiscal year. As a result, the MPC noted that it was important for monetary policy to remain supportive. The MPC observed that given the Covid-related uncertainties, the cost of withdrawing monetary stimulus too soon exceeded that of withdrawing too late.
Looking ahead, in the absence of unforeseen circumstances, the MPC expects monetary policy to remain accommodative in the near term, and any adjustments in the policy rate to be measured and gradual to achieve mildly positive real interest rates over time. If demand side pressures emerge as the recovery becomes more durable and the economy returns to full capacity, the MPC noted that it would be prudent for monetary policy to begin to normalize through a gradual reduction in the degree of accommodation. This would help ensure that inflation does not become entrenched at a high level and financial conditions remain orderly, thereby supporting sustainable growth.
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.
