KARACHI: SBP’s Monetary Policy Committee decided on Friday to retain the policy rate at 7 percent, underlining that since it’s their last meeting in January 2021 the growth and employment have continued to recover and business sentiments also improved.
The policy is has not changed since July 2020 to deal with with COVID-19 pandemic’s negative impact on the country’s economy, earlier January 2020, it was 13.25 percent.
According to the official statement of SBP, at around 3 percent, growth in fiscal year 2020-21 is now anticipated to be higher than formerly predicted due to improved prospects for manufacturing and reflecting in part the monetary and fiscal stimulus provided during Covid-19.
Mentioning the inflation out-turns, the statement cited, inflation out-turns have been unstable, with the lowest reading on headline inflation in more than two years in January 2021 followed by a sharp rise in February.
The SBP estimates show that the up to date increase in electricity tariffs and sugar and wheat prices accounts for about 1½ percentage points of the 3 percentage point increase in inflation between the January and February out-turns.
The recent increase in electricity prices will continue to manifest in headline numbers in coming months, keeping average inflation in financial year 2020-21 close to the upper end of the previously announced range of 7-9 percent.
While noting that the recent increase in inflation is primarily due to supply-side factors, the output gap is still estimated to be negative, core inflation continues to be relatively subdued, and inflation expectations while drifting up somewhat due to the recent increase in headline inflation numbers are still well-anchored, the MPC highlighted.
The MPC considered key trends and prospects in the real, external and fiscal sectors, and the resulting outlook for monetary conditions and inflation, the statement mentioned.
Looking ahead, as the temporary increase in inflation from administered prices wanes, inflation should fall to the 5-7 percent target range over the medium-term.
Given this underlying inflation trajectory, the MPC felt that the existing accommodative stance of monetary policy remained appropriate to support the recovery while keeping inflation expectations well-anchored and maintaining financial stability.
From a policy mix perspective as well, given that fiscal policy is expected to remain contractionary to reduce public debt, the MPC noted that it was important for monetary policy to be supportive as long as second-round effects of recent increases in administered prices and other one-off supply shocks do not materialize and inflation expectations remain well anchored.
The MPC also took account of the uncertainty around the inflation and growth outlook. On the growth front, the MPC noted that despite recent momentum, risks remain due to the emergence of a third, more strong wave of Covid in Pakistan just as the vaccine roll-out is beginning.
In terms of the inflation outlook, this summer’s wage negotiations and any new tax measures in the next year’s budget could add further supply-side shocks.
Referring to the price hikes, the statement mentions that the optimism about a stronger US-led world recovery this year is translating into higher international commodity prices.
This also includes both food and oil, which could persist to feed into domestic inflation. These trends in the outlook for inflation and growth will need to be carefully monitored.
In the absence of unforeseen developments, the MPC expects monetary policy settings to remain broadly unchanged in the near term. As the recovery becomes more durable and the economy returns to full capacity, the MPC expects any adjustments in the policy rate to be measured and gradual to achieve mildly positive real interest rates.