KARACHI: The Monetary Policy Committee (MPC) of the State Bank of Pakistan on Friday decided to maintain the policy rate at seven percent.
At its meeting on 28th May 2021, the Monetary Policy Committee (MPC) decided to maintain the policy rate at 7 percent.
The MPC was encouraged by the further upward revision in the FY21 growth forecast to 3.94 percent during last two months. This confirmed the strength of the broad-based economic rebound underway since the start of the fiscal year, on the back of targeted fiscal measures and aggressive monetary stimulus. This positive momentum is expected to persist, translating into higher growth next year, the committee said.
“Inflation rose to 11.1 percent (y/y) in April, propped up by the lingering impact of this February’s electricity tariff increase as well as a pick-up in month-on-month food prices, partly driven by the usual seasonality around Ramzan. The MPC noted that supply-shocks to food and energy still dominate. It also observed that although core inflation in urban areas has risen by around 1.5 percentage points, available evidence suggests that demand-side pressures on inflation continue to be relatively contained,” read a press release issued by the SBP.
As previously forecast, the headline year-on-year inflation rate is likely to remain elevated in the coming months due to the recent electricity tariff hike, pushing the average for FY21 close to the upper end of the announced range of 7-9 percent. As supply shocks dissipate thereafter, inflation is expected to gradually fall toward the 5-7 percent target range over the medium-term.
In reaching its decision, the MPC said it considered key trends and prospects in the real, external and fiscal sectors, and the resulting outlook for monetary conditions and inflation.
“The latest National Income Accounts data confirm that the economy has rebounded strongly from last year’s severe Covid-shock, led by services and industry. The industrial sector is estimated to have grown 3.6 percent during FY21, driven by construction and large-scale manufacturing, especially the food, cement, textile and automobile sectors. The strong rebound is also reflected in exceptionally strong growth recorded in multiple high-frequency indicators across all three quarters of the year, including sales of fast-moving consumer goods and POL products.
“The agriculture sector is estimated to have grown 2.8 percent, with the production of three important crops―wheat, rice and maize―rising to record highs and that of sugar cane to its second-highest ever level. Buoyed by the strong performance in commodity-producing sectors, services are estimated to have rebounded from last year’s contraction to register growth of 4.4 percent, led by wholesale and retail trade,” it maintained..
The MPC noted that, unlike several previous growth upturns in Pakistan, the current economic recovery has been achieved without compromising external stability. At $0.8 billion, the current account has remained in surplus through the first ten months of FY21 for the first time in 17 years.
In recent months, imports have picked up with the economic recovery, rising international commodity prices, as well as one-off shipments of wheat and sugar to quell temporary domestic shortages. However, this is being largely offset by record remittances, which rose to all-time highs in April on both a monthly ($2.8 billion) and cumulative basis ($24.2 billion).
In addition, exports have grown by almost 14 percent (y/y) so far this year, mainly due to high-value added textiles and favorable prices. In March, Pakistan successfully completed the combined 2nd-5th reviews of the IMF program and returned to international capital markets by raising $2.5 billion through an over-subscribed Eurobond, issued at yields below the initial price guidance.