The State Bank of Pakistan (SBP) has declared the recent rise in inflation in the country as temporary and announced to keep the interest rate at 7%.
Briefing the media in Karachi, SBP Governor Raza Baqir said that the main responsibility of the SBP was to curb the rise in inflation. In this regard, the Monetary Policy Committee observed that the annual inflation rate was 7-9%.
He said that if there was any increase in electricity or international oil prices, it would be temporary and food inflation was also temporary so the committee was of the view that there was no need to change interest rates because of them.
He said that the Monetary Policy Committee was of the view that there was no pressure on demand as our capacity was not fully utilized and there was a balance in forecasting inflation.
Raza Baqir said that for all these reasons, the Monetary Policy Committee should keep an eye on the economic situation. He was of the view that the situation was getting better than before. Amidst COVID-19, the economic situation of Pakistan was very difficult but now the situation is improving.
The SBP governor said that the indication is that the interest rate will remain the same in the future and going forward, as our economic condition improves and the economic recovery is strong, then the interest rate needs to be changed. So it will not happen all at once, but if there is a change, it will come gradually.
Raza Baqir said that today our economic condition is not the same as when the IMF program was started in June 2019, today our economic condition is much better than that, we have to make some such decisions keeping in view the needs of the time, so we are confident today that we will provide forward guidance like other central banks.
He said that the Monetary Policy Committee has indicated that in the near future they are looking at the interest rate at the same level as it is today.
He said the reason for this confidence was that there was a time when the exchange rate was falling due to the current account deficit and the treasury was also declining and at one time there was an annual deficit of Rs 19 billion but so far this year there is a surplus.
He said another reason for the confidence in the economy’s recovery was that institutional changes were made to improve the current account and the exchange rate system.
Governor SBP said that this does not mean that it should be left completely open, but that the SBP has the option to bring it back into balance if the market conditions are unbalanced. We have made this change in May, June 2019.
It may be recalled that the SBP Monetary Policy Committee in its meeting held on June 25, 2020, had reduced the policy rate by 100 basis points to 7%.
The State Bank of Pakistan had announced three reduction in interest rates in a period from March to April 2020 due to the negative effects of Coronavirus on the national economy.
On March 17, 2020, the interest rate was reduced by 75 basis points to 12.5 per cent, followed by a further one and a half per cent cut in the policy rate a week later.
Then on April 16, 2020, the SBP announced a 2% cut in interest rates due to the negative effects of the coronavirus on the national economy, bringing the interest rate to 9%, and a month later on May 15. The interest rate was further reduced to 8%.
The SBP later cut interest rates by one percentage point to 7% on June 25, 2020, to support the economy, which has been hit hard by the coronavirus.
The statement said the decision was taken to reduce the risk of economic slowdown and slowdown in the country’s growth and to improve the growth rate and boost employment.