SBP keeps policy rate unchanged, says 2021 inflation expected to be in 7-9% range

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SBP keeps policy rate unchanged, says 2021 inflation expected to be in 7-9% range

Foreign exchange dealers count Pakistani currency notes. File photo

KARACHI: Pakistan’s central bank announced on Monday that the current interest rate at 7% would remain unchanged and that it expected inflation for fiscal year 2021 (FY21) to fall within the previously announced range of 7-9%.

The State Bank of Pakistan (SBP) decided to maintain the current interest rate at 7% during a meeting of the Monetary Policy Committee (MPC) earlier today, it said in a statement.

It observed that since September, “the domestic recovery has gradually gained traction, in line with expectations for growth of slightly above 2% in FY21, and business sentiment has improved further. Nevertheless, there are risks to the outlook”.

According to the MPC, although the COVID-19 cases were rising around the world and in Pakistan, “it could take some time to fully implement worldwide [and] there has been recent encouraging news on vaccine development”.

Speaking of inflation, it said although food prices were rising, the supply-side pressures were “likely to be temporary” and that average inflation in FY21 was expected to remain in the previously announced range of 7-9%. “Taken together, risks to the outlook for both growth and inflation appear balanced,” it said.

“Headline inflation has remained close to 9% 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,” the statement read.

Real sectors’ performance

The ongoing monetary policy, it added, was appropriate to support the nascent recovery in light of the COVID-19 pandemic and the earlier stimuli would “continue to shore up growth in coming quarters”.

With regard to the real sector, the SBP said the construction and manufacturing sectors led recovery, whereas the sales of Fast Moving Consumer Goods (FMCGs) rebounded, those of POL and automobiles surpassed pre-pandemic levels, and cement’s at an all-time high.

Large scale manufacturing (LSM) grew 4.8% year-on-year (YoY) against a 5.5% contraction in the same quarter last year, it said.

Textiles, petroleum products, food and beverages, paper and board, pharmaceuticals, chemicals, cement, fertilizer, and rubber products were the major sectors that saw gains, the statement added. In addition, growth in other major crops and higher wheat production would offset the likely decline in cotton production.

However, the services sector continued to bear the brunt of the COVID-19 pandemic due to social distancing practices.


Forex reserves rise to $12.9 billion

Pakistan’s current account in the first quarter of FY21 saw the first quarterly surplus in more than five years, whereas the cumulative reached a surplus of $1.2 billion, as compared to a deficit worth $1.4 billion in the same period last year, mainly owing to an improvement in the trade balance and record remittances.

The SBP revealed that Pakistan’s exports recovered to the pre-COVID-19 levels of around $2 billion in September and October, with the textiles, rice, cement, chemicals, and pharmaceuticals sectors experiencing the biggest improvements. Moreover, suppressed domestic demand and lower global oil prices kept the imports low.

The SBP said Pakistan’s foreign exchange reserves grew to their highest level since February 2018 to $12.9 billion, with the current account deficit for the ongoing fiscal year now projected to be below 2% of the GDP.

“Despite lower non-tax revenue, the primary balance posted a surplus of 0.6% of GDP in FY21 Q1, similar to the levels achieved during the same period last year,” the central bank said, adding that the Public Sector Development Programme (PSDP) payments shot up 12.8% (YoY) in the first four months of this year.

The Federal Board of Revenue’s (FBR) tax collections grew 4.5% (YoY) in July-October.

In line with analysts’ forecasts

A majority of analysts had earlier said they expected the SBP to maintain the policy rate status quo as it had back in its September meeting.

In the easing cycle from March to June 2020, the central bank has reduced interest rates by 625 basis points to 7% as a response to the COVID-19 pandemic and with a view to supporting the economic growth.

Speaking to The News, the analysts had said the central bank’s recent projections in its annual report on the State of Economy for FY20 indicated no change in the policy stance at least this year.

The SBP, it seemed, would keep its stance loose till the economy recovered to its potential and the current account deficit stayed under 2.5% of GDP, the analysts had said.

Some analysts had also said the MPC was expected to remain cautious and would keep an eye on inflation.

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