Connect with us

Pakistan

SBP increases policy rate by 25 bps to 7.25%, aims to control 'unbridled' inflation

Karachi: The State Bank of Pakistan (SBP) on Monday increased its policy rate by 25 basis points in a bid to control rising inflation in the country.

Published

on

SBP increases policy rate by 25 bps to 7.25%, aims to control 'unbridled' inflation
GNN Media: Representational Photo

Announcing the bi-monthly monetary policy review, the central bank said the decision to increase the interest rate to 7.25% was taken because the pace of the economic recovery has exceeded expectations,” a monetray policy statement issued by the central bank read.

“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,” it read.

According to the statement, the 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.

In its previous policy review on July 27, the central bank had kept the policy rate unchanged at 7% for the sixth time in a row during 13 months. The bank had also hinted at maintaining the benchmark interest rate at the current level in its previous MPS.

However, the SBP said in line with a shift in the economic outlook, the monetary policy committee (MPC) was of the view that the priority of monetary policy also needed to gradually pivot from catalysing the recovery after the COVID-19 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 bank said.

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.

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 further 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.

Real sector

With a supportive FY22 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.

External sector

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 nonessential imports, and appropriate macroeconomic policy settings to contain import growth.

Fiscal sector

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.

Monetary and inflation outlook

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 macroprudential 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.

Faisal Ali Ghumman

Faisal Ali Ghumman is a senior editor at GNN, known for writing top quality content which garner very high readerships and has been covering every field of journalism, including politics, media, sports and scholarly articles. Faisal Ali Ghumman is nothing less than a Veteran Editor and has been writing for GNN for the past 4 months.

Pakistan

Pakistan logs 1,212 new COVID cases; positivity ratio at 2.60%  

According to National Command and Operations Center (NCOC), around 1,212 cases of coronavirus were reported while 39 people succumbed to the disease in the last 24 hours, taking the total death toll to 27,986.

Profile Avatar

Published

on

Pakistan logs 1,212 new COVID cases; positivity ratio at 2.60%  

Islamabad: Pakistan is presently experiencing the fourth wave of coronavirus which is said to be deadlier and more contagious than the previous three COVID waves. Today, the daily positivity rate in-country is at 2.60%.

According to National Command and Operations Center (NCOC), around 1,212 cases of coronavirus were reported while 39 people succumbed to the disease in the last 24 hours, taking the total death toll to 27,986.

The total number of cases has reached 1,253,868.

As many as 1,181,054 patients have recovered from the disease with 3,079 critical cases.

Punjab 

The number of patients swelled to 434,139 in the province with 12,724 causalities.

Sindh

The number of infections has surged to 461,258 in the province, while the death toll has reached 7,451.

Khyber Pakhtunkhwa

The confirmed cases have surged to 175,012 in the province with 5,608 casualties.

Balochistan

There are 33,004 confirmed cases while 349 patients have died from the infection so far.

AJK and Gilgit-Baltistan

There are 34,278 coronavirus cases in the AJK while the death toll has reached 738. On the other hand, there are 10,338 cases in GB with 186 coronavirus deaths.

Islamabad

There are 105,839 cases in the capital city while 930 people have lost their lives.

Continue Reading

Pakistan

Pakistan logs over 600 new COVID infections, 20 deaths 

According to National Command and Operations Center (NCOC), around 603 cases of coronavirus were reported while 20 people succumbed to the disease in the last 24 hours, taking the total death toll to 28,300.

Profile Avatar

Published

on

Pakistan logs over 600 new COVID infections, 20 deaths 

Islamabad: Amid a steady decline in Covid-19 infections, Pakistan's coronavirus positivity ratio further fell to 1.37% with 603 new cases.

According to National Command and Operations Center (NCOC), around 603 cases of coronavirus were reported while 20 people succumbed to the disease in the last 24 hours, taking the total death toll to 28,300.

Pakistan is presently experiencing the fourth wave of coronavirus which is said to be deadlier and more contagious than the previous three COVID waves.

The total number of cases has reached 1,265,650.

As many as 1,211,710 patients have recovered from the disease with 1,852 critical cases.

Punjab

The number of patients swelled to 438,133 in the province with 12,861 causalities.

Sindh

The number of infections has surged to 466,154 in the province, while the death toll has reached 7,533.

Khyber Pakhtunkhwa

The confirmed cases have surged to 176,950 in the province with 5,689 casualties.

Balochistan

There are 33,133 confirmed cases while 354 patients have died from the infection so far.

AJK and Gilgit-Baltistan

There are 34,406 coronavirus cases in the AJK while the death toll has reached 740. On the other hand, there are 10,370 cases in GB with 186 coronavirus deaths.

Islamabad

There are 106,504 cases in the capital city while 937 people have lost their lives.  

Continue Reading

Pakistan

34 more succumb to COVID-19 in Pakistan; 1,656 new cases emerge 

Pakistan is presently experiencing the fourth wave of coronavirus which is said to be deadlier and more contagious than the previous three COVID waves. Today, the daily positivity rate in-country is at 3.26%.

Profile Avatar

Published

on

34 more succumb to COVID-19 in Pakistan; 1,656 new cases emerge 

Islamabad: Pakistan is presently experiencing the fourth wave of coronavirus which is said to be deadlier and more contagious than the previous three COVID waves. Today, the daily positivity rate in-country is at 3.26%.

According to National Command and Operations Center (NCOC), around 1,656 cases of coronavirus were reported while 35 people succumbed to the disease in the last 24 hours, taking the total death toll to 27,785.

The total number of cases has reached 1,249,858.

As many as 1,175,489 patients have recovered from the disease with 3,444 critical cases.

Punjab   

The number of patients swelled to 432,809 in the province with 12,672 causalities.

Sindh

The number of infections has surged to 459,392 in the province, while the death toll has reached 7,425.

Khyber Pakhtunkhwa

The confirmed cases have surged to 174,490 in the province with 5,571 casualties.

Balochistan

There are 32,956 confirmed cases while 349 patients have died from the infection so far.

AJK and Gilgit-Baltistan

There are 34,216 coronavirus cases in the AJK while the death toll has reached 738. On the other hand, there are 10,331 cases in GB with 184 coronavirus deaths.

Islamabad

There are 105,664 cases in the capital city while 927 people have lost their lives.

Continue Reading

Trending