In a major policy shift, the State Bank of Pakistan (SBP) on Monday announced its decision to revise up the benchmark interest rate by 0.25 bps to 7.25% for the next two months. The Monetary Policy Committee (MPC) changed the policy rate after nearly 15 months.

Since its last meeting in July, the Monetary Policy Committee (MPC) noted that the pace of the economic recovery has exceeded expectations,” the SBP said in a statement, adding that the robust recovery in domestic demand, coupled with higher international commodity prices, was leading to a strong pick-up in imports and a rise in the current account deficit.

This rise of 25 bps came as a surprise to a huge majority of the market participants as they were expecting the SBP to continue with its streak of maintaining the interest rate at 7 %.

The shift in the status quo has come about after nearly 15 months of keeping the interest rate at 7% in order to support the economy in the face of the pandemic. The central bank had drastically reduced the interest rate back in June 2020. This was in accordance with the policy to keep the interest rate low in order to counter the impact of the COVID-19 induced lockdown. The reduction of the policy rate led to the easing of interest payments for both businesses as well as households. From March 2020 to June 2020 the aggregate reduction in the rate was 625 bps from a previous rate of 13.25%. Ever since the MPC has maintained the 7% policy rate in order to promote financial stability and economic growth.

The Central Bank revises the policy rate or keeps it unchanged based on the inflation readings and various economic variables. The policy rate is used as a tool to regulate inflation, avoid needless rupee movement and lend support to the economy.

According to the State Bank of Pakistan, at present, the economy seems less vulnerable against the pandemic-induced uncertainty, hence, the focus on implementing policies that can promote the longevity of growth, tackle the inflation rates, and minimize the current account deficit. Keeping in mind the current economic outlook, the MPC plans on prioritizing the sustainability of the economic recovery post-Covid-19. In order to achieve that, MPC intends to progressively taper the monetary stimulus which has been provided in the last year and a half. Furthermore, the MPC intends to reduce the burden on the exchange rate pertaining to the increasing current account deficit via other tools such as adjusting interest rates.

After this unexpected move to increase the rate by 25bps, analysts are now expecting the bank to further increase the rate by 25-50 bps in the upcoming monetary policy announcement which will be held in November 2021.


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