The State Bank of Pakistan (SBP) has announced its bi-monthly monetary policy on Friday and decided to maintain its policy rate at 7 per cent, according to a statement issued by the bank.

The Monetary Policy Committee’s meeting was chaired by Central Bank Governor Dr Reza Baqir, who said the decision was taken keeping in mind the current situation.

The Monetary Policy Committee (MPC), said in its statement that since the last meeting in November, the domestic recovery has gained some further traction. “Most economic activity data and indicators of consumer and business sentiment have shown continued improvement. As a result, there are upside risks to the current growth projection of slightly above 2 per cent in FY21.”

The MPC noted that since the last meeting in November, the domestic recovery has gained some further traction. Most economic activity data and indicators of consumer and business sentiment have shown continued improvement.

On the inflation front, recent out-turns are also encouraging, suggesting a waning of supply-side price pressures from food and still-benign core inflation. While utility tariff increases may cause an uptick in inflation, this is likely to be transient given excess capacity in the economy and well-anchored inflation expectations. As a result, inflation is still expected to fall within the previously announced range of 7-9 per cent for FY21 and trend toward the 5-7 per cent target range over the medium-term.

With the inflation outlook relatively benign aside from the possibility of temporary supply-side shocks, the MPC felt that the existing accommodative stance of monetary policy remained appropriate to support the nascent recovery while keeping inflation expectations well-anchored and maintaining financial stability.

While noting these favorable growth and inflation developments, the MPC also stressed that considerable uncertainty remains around the outlook. The trajectory of the Covid pandemic is difficult to predict, given still-elevated global cases, the emergence of new strains, and lingering uncertainties about the roll-out of vaccines worldwide. Such external shocks could slow the recovery.

In light of such Covid-related uncertainties, the MPC considered it appropriate to provide some forward guidance on monetary policy to facilitate policy predictability and decision-making by economic agents.

In the absence of unforeseen developments, the MPC expects monetary policy settings to remain 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 economic recovery underway since July has strengthened in recent months. Large-scale manufacturing (LSM) grew by 7.4 per cent (y/y) in October and 14.5 per cent (y/y) in November. The manufacturing recovery is also becoming more broad-based, with 12 out of 15 subsectors registering positive growth in November and employment beginning to recover.

So far this fiscal year, LSM has grown by 7.4 per cent (y/y), against a contraction of 5.3 per cent during the same period last year. Nevertheless, the level of manufacturing activity generally remained below average levels in FY19, pointing to continued spare capacity in the economy.

On the demand side, cement sales remain strong on the back of rising construction activity, POL sales are at two-year highs, and automobile sales are also rising in both urban (motorcars) and rural (tractors) markets. In agriculture, cotton output is likely to decline more than expected based on latest production estimates.

However, this is likely to be offset by improved growth in other major crops and higher wheat production due to the rise in support prices along with announced subsidies on fertilisers and pesticides for Rabi crops. While social distancing is still affecting some service sectors, wholesale, retail trade and transportation are expected to benefit from improvements in construction and manufacturing activity.

Following five consecutive months of surpluses, the current account registered a deficit of $662 million in December. While remittances and exports continued to grow steadily, the trade deficit rose due to a rise in imports of machinery and industrial raw material, in line with the pick-up in economic activity.