Pakistan’s central bank likely to keep interest rate unchanged

KARACHI: The State Bank of Pakistan (SBP) is expected to keep its key interest rate unchanged at 7 percent amid economic recovery, experts say, as the central bank is scheduled to announce its monetary policy for the next two months on Monday.
The SBP slashed its key policy rate from 13.25 percent to 7 percent between March 17 and June 25 to support the economy hit by the coronavirus outbreak.  
"The central bank is expected to keep the interest rate unchanged because the COVID situation prevails and we believe that the government will not like to increase rates amid the economic recovery," Samiullah Tariq, head of research at Pakistan Kuwait Investment, told Arab News on Sunday.
According to a poll conducted by Topline Securities, majority of top-notch financial market participants also believe the rate will remain the same.
"Out of 72 responses received, 87.5 percent are of the view that rate will remain unchanged, 7 percent voted for a rate increase of 25 bps and above,” Muhammad Sohail, chief executive of Topline Securities said.
Another brokerage firm, Arif Habib Limited (AHL), also predicts that the monetary stance would not change.  
“We expect the SBP to keep policy rates unchanged at 7 percent in the upcoming monetary policy statement," AHL said in a report, forecasting that inflation is likely to ease in coming months.
The central bank forecasts that the average inflation rate would be between 7 percent and 9 percent during the current fiscal year.  
Pakistani industrialists, however, are calling for a further reduction of interest to 5 percent, saying it is necessary for the growth momentum and industrialization in the country.   
"Our economy was on a ventilator before that coronavirus outbreak and after the situation turned worst the unemployment has substantially increased and now the government is taking long-term measures and it seems that the economic situation is improving," Sheikh Sultan Rehman, vice president of the Federation of Pakistan Chambers of Commerce and Industry (FPCCI), told Arab News.
"There are signs of economic recovery and to keep the momentum continue we demand that the interest should be reduced to 5 percent and gradually to around 3 percent for long-term growth," he said.   
Economists say that in the current global and domestic situation, monetary policy has to ensure that financing conditions remain favorable.
"An uncertain global recovery is pushing central banks to actively ensure that monetary policy remains geared to financing the whole economy. In addition, lower inflation has given room for near zero rates globally," said Dr. Khaqan Najeeb, former advisor at the Ministry of Finance.  
He added that with slowing growth and higher food inflation the task is complex for Pakistan.
The central bank expects that economic growth would be between 1.5 percent and 2.5 percent as compared with the negative growth of 0.4 percent recorded in the previous fiscal year. Pakistan had recorded negative growth for the first time since 1952.  
"Monetary policy has to ensure financing conditions remain extremely favorable. Beyond just lower funding costs it is crucial to recalibrate instruments to counteract the negative impact of funding measures for containment of the virus," Dr. Najeeb said.