Karachi, March 19, 2021: The Monetary Policy Committee (MPC), in its meeting on 19th March 2021, has decided to maintain the policy rate at 7 percent.
The MPC noted that since the last meeting in January, growth, and employment have continued to recover and business sentiment has further improved. While still modest, at around 3 percent, growth in FY21 is now projected to be higher than previously anticipated due to improved prospects for manufacturing and reflecting in part the monetary and fiscal stimulus provided during Covid.
Recent inflation out-turns have been volatile, with the lowest reading on headline inflation in more than two years in January 2021 followed by a sharp rise in February. According to SBP estimates, the recent increase in electricity tariffs and sugar and wheat prices accounts for about 1½ percentage points of the 3 percentage point increase in inflation between the January and February out-turns. The recent increase in electricity prices will continue to manifest in headline numbers in the coming months, keeping average inflation in FY21 close to the upper end of the previously announced range of 7-9 percent.
The committee said that the recent increase in inflation is primarily due to supply-side factors. The MPC also highlighted that the output gap is still estimated to be negative, core inflation continues to be relatively subdued, and inflation expectations while drifting up somewhat due to the recent increase in headline inflation numbers—are still well-anchored. Looking ahead, as the temporary increase in inflation from administered prices wanes, inflation should fall to the 5-7 percent target range over the medium-term.
Given this underlying inflation trajectory, the MPC felt that the existing accommodative stance of monetary policy remained appropriate to support the recovery while keeping inflation expectations well-anchored and maintaining financial stability. From a policy mix perspective as well, given that fiscal policy is expected to remain contractionary to reduce public debt, the MPC noted that it was important for monetary policy to be supportive as long as second-round effects of recent increases in administered prices and other one-off supply shocks do not materialize and inflation expectations remain well-anchored.
In reaching its decision on the policy rate, the MPC also took note of the uncertainty around the inflation and growth outlook. On the growth front, the MPC noted that despite recent momentum, risks remain due to the emergence of a third, more virulent wave of Covid in Pakistan just as the vaccine roll-out is beginning.
In terms of the inflation outlook, this summer’s wage negotiations and any new tax measures in the next year’s budget could add further supply-side shocks. In addition, optimism about a stronger US-led world recovery this year is translating into higher international commodity prices, including both food and oil, which could continue to feed into domestic inflation.
These trends in the outlook for inflation and growth will need to be carefully monitored. In the absence of unforeseen developments, the MPC expects monetary policy settings to remain broadly unchanged in the near term. As the recovery becomes more durable and the economy returns to full capacity, the MPC expects any adjustments in the policy rate to be measured and gradual to achieve mildly positive real interest rates.
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.
The MPC noted that despite the recent slight uptick in market yields, financial conditions remain appropriately accommodative given continued slack in the economy, on-going fiscal consolidation and well-contained risks to financial stability. Following a seasonal contraction due to retirement of working capital loans in January, private sector credit has resumed its expansionary trend across all major lending categories.
Through FY21 so far, private sector credit has surpassed last year’s corresponding levels on the back of a sizable expansion in fixed investment loans and consumer financing, primarily due to the lower interest rate environment as well as the SBP’s subsidized refinancing schemes, especially LTFF and TERF.
The MPC said that it will monitor these developments carefully and react to them appropriately when needed.
