SBP Increases Policy Rate by 0.25%

The State Bank of Pakistan’s (SBP) Monetary Policy Committee (MPC) on Monday raised the policy rate by 25 basis points to 7.25 percent from 7 percent, according to a statement issued by the bank.

The hike came after the SBP kept its policy rate unchanged at 7 percent for more than a year.

SBP shifts monetary policy focus to growth sustainability

“Since its last meeting in July, the MPC noted that the pace of the economic recovery has exceeded expectations,” the bank’s statement said.

“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,” the SBP added in its statement. “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”.

The country’s economic recovery seems less prone to pandemic-linked uncertainty, the SBP said, with the government managing to keep the latest COVID-19 wave under control.

“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,” said the central bank.

This is why the MPC now believes that monetary policy needs to focus on sustaining economic recovery at its current pace, instead of further accelerating it.

The committee noted that this would be best achieved by “gradually tapering” the monetary stimulus the bank has been providing 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 statement went on to say.

The bank added that monetary policy would still remain accommodative and supportive of growth.

Some analysts commend the move, while some are wary

A.A.H Soomro, managing director at Khadim Ali Shah Bukhari Securities, commended the SBP’s decision, tweeting that this would help to address weakness in the current account and the Pakistan rupee’s depreciation.

Soomro told ProPakistani, “This is a proactive approach from SBP despite political pressures. SBP is welcoming the change in the policy of monetary easing in a subtle, confidence-boosting & measured way. This was needed & will restore confidence that risks are being looked after. Unlike 2016 & 2017. A 25 bps is symbolic yet not at all confidence hurting. Growth is still being prioritized”.

However, Former Treasury Head-Chase Manhattan Bank, Asad Rizvi, believed the decision was ill-advised. He said that the move was unnecessary and that this could negatively affect the local currency and stock market.

SBP defends rupee depreciation

Regarding expansion in the current account deficit and Pakistani rupee depreciation, the central bank said, “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”.

However, the bank acknowledged 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 nonessential imports, and appropriate macroeconomic policy settings to contain import growth”.

Inflation expectations

Regarding inflation, the MPC noted that inflation fell from 9.7 percent year-over-year in June to 8.4 percent in both July and August.

However, inflation did increase month-on-month, to 0.6 percent in August from 1.3 percent in July.

The trend in inflation will depend on domestic demand and international commodity prices, but the central bank assured that it would monitor inflation expectations carefully, and adjust its policies as needed to keep inflation within the target range.

Real sector

SBP expects GDP growth to tend towards the upper range of its forecast of 4-5% in FY 2022. This projection is supported by strong growth in automobiles, POL (petroleum, oil and lubricants) sales, cement sales, electricity generation.

The bank added, “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”.


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