Unchanged Interest Rate | Editorial

THE decision taken by the State Bank of Pakistan to continue an accommodative monetary policy by keeping its policy rate unchanged at 7pc comes as no surprise. It is in line with market expectations. The bank believes that inflation will remain within 7pc to 9pc and notes that domestic economic recovery has gradually gained traction (since July) in line with growth projections of slightly above 2pc for the present fiscal year. Business confidence has improved. Nevertheless, it warns, there are considerable risks to the outlook, for instance, the resurgence of Covid-19 infections. Still, according to the bank’s monetary policy statement, the risks to the outlook for both “growth and inflation appear balanced for policymakers”.

By keeping the real interest rates in negative territory despite CPI inflation of around 9pc during the last two months, the bank has clearly signalled its willingness to continue divergence from its previous ‘forward-looking’ policy stance until it cannot. Aside from a better economic outlook and range-bound inflationary projections, the recent improvements in the current account and on the fiscal side, as well as the suspension of the loan deal with the IMF since February, are also helping the bank resist the temptation of raising the policy rate. It is, therefore, safe to assume that the State Bank will not increase the cost of credit for the private sector or the government, the single largest customer of commercial banks, until the Covid-19 challenge is over. The sharp reduction in the interest rate has proved perhaps to be the most effective measure among a raft of pro-growth actions implemented by both bank and government in the wake of the pandemic in reviving economic activities and encouraging investment ever since the lockdown restrictions were lifted. Even the improvement on the fiscal side is due to lower interest rates to a large extent, allowing the government to jack up its spending on development schemes. The reversal of the policy stance in the near- to medium-term could easily shatter the current growth momentum.

Published in Dawn, November 26th, 2020

Source: https://www.dawn.com/news/1592465/unchanged-interest-rate

About The CSS Point

The CSS Point is the Pakistan 1st Free Online platform for all CSS aspirants. We provide FREE Books, Notes and Current Affairs Magazines for all CSS Aspirants.

The CSS Point - The Best Place for All CSS Aspirants

January 2021
Template Design © The CSS Point. All rights reserved.
Skip to toolbar