Pakistan has kept its main policy rate unchanged at 7 per cent, the central bank said on Monday, as consumer price index inflation remained close to 9 per cent.

It is the second time that Pakistan has kept its main policy rate unchanged after cutting it 625 basis points, down from 13.25 per cent, at the time the global pandemic hit its economy in February.

“Overall financial conditions remain appropriately accommodative, with the real policy rate remaining in slightly negative territory on a forward-looking basis,” a statement from the State Bank of Pakistan said, quoting the monetary policy committee (MPC), which met on Monday.

The statement said headline inflation had fallen sharply since January but remained close to 9 per cent, primarily driven by sharp increases in food items due to supply-side issues.

However, it said core inflation remained relatively moderate and stable, and price indexes suggested a weakening of food price momentum.

“Risks to the inflation outlook are balanced,” the statement said.

Pakistan’s rate remained on the high side until earlier this year, at 13.25 per cent, primarily to contain inflation, before a series of cuts to spur economic activity amidst the pandemic.

“The MPC noted that since the last meeting in September, the domestic recovery has gradually gained traction, in line with expectations for growth of slightly above 2 per cent in FY21, and business sentiment has improved further.”

The statement said that the monetary policy committee, which met on Monday, “noted that since the last meeting in September, the domestic recovery has gradually gained traction, in line with expectations for growth of slightly above 2 per cent in FY21, and business sentiment has improved further.”

It is the second time that Pakistan has kept its main policy rate unchanged after cutting it 625 basis points, down from 13.25%, at the time the global pandemic hit its economy in February.

Meanwhile the The State Bank of Pakistan (SBP) said that following the difficult but necessary stabilisation efforts during the first nine months of the fiscal year 2019-20, the country’s economy was well on course for a steady recovery despite the COVID-19 pandemic.

The State of Pakistan’s Economy for the fiscal year 2019-20 report released by the central bank says that by February 2020, the unprecedented balance of payments crisis created by the unsustainable macroeconomic policies of previous years had been forcefully addressed through sizable reductions in the twin fiscal and current account deficits.

Following a round of monetary tightening during FY19, core inflation remained relatively stable, notwithstanding an uptick in headline inflation due to one-off and seasonal factors. In turn, this hard-won stabilisation was beginning to lead to the revival of economic activity and the restoration of business and consumer confidence.

However, the report adds, this momentum was temporarily disrupted around the last quarter of the fiscal year by the global and domestic spread of COVID-19 and the lockdown measures that it necessitated.

While these measures were remarkably successful in containing the outbreak in Pakistan, they simultaneously strained manufacturing, retail, transport and trade-related activities. As a result, Pakistan’s real GDP is estimated to have contracted by 0.4 per cent in FY20, the country’s first brush with negative economic growth since FY52.

The report highlights that it was only due to the earlier gains on the macroeconomic stability front that policymakers in Pakistan were able to extend aggressive support to businesses and households in response to the Covid-19 outbreak.

Without this support, the private sector would have found it even more challenging to cope with the fallout from the mobility restrictions and supply-chain disruptions created by the biggest global economic crisis since the Great Depression.

In an unprecedented move, the government was able to expand the volume and outreach of its social uplift programs, enabling over 14.8 million households to receive emergency cash transfers for meeting essential needs to date.