The State Bank of Pakistan has maintained its main policy rate at 13.25 percent. Governor Reza Baqir announced that the anticipated monetary policy shall retain interest rate for the next two months as the central bank seeks to add stimulus to the economy and tame the inflation.
The central bank has held rates at an elevated level since last July which has subdued investor confidence and has hampered investment. The SBP governor said they need to control inflation and also increase exports, while noting that the key economic indicators from the previous year were improving.
Inflation rose 12.6% percent last year till December as rising costs for items such as food put pressure on household budgets, while hike in oil, gas, and power prices have raised costs for business. Baqir said that inflation will start declining gradually but was unsure when this would occur.
The central bank would likely keep the interest rate higher than the inflation rate as it would lead to more outflows. Pakistan is expected to face a nine-year inflation high at over 13.5 percent this month, and the interest rate remains an effective tool to contain it. Analysts argue that the recent surge in inflation was a short term phenomenon and the rate would start dropping from March while interest rate cuts would begin from then onwards.
Pakistan was facing shrinking foreign exchange reserves and a large current account deficit when it sought a bailout package from the IMF in April. The current account deficit has now shrunk by 75 percent to $2.15 billion in the last six months ending December, while foreign reserves have risen more than 60 percent to $11.7 billion in the last six months.
The government has hailed the economic stablisation and recovery but this has raised concerns over the so-called “hot money” as the high-interest rates draw foreign investment into short-term debt which could pose a risk when withdrawn. In the medium term, Pakistan will need to increase fiscal spending or lower interest rates to spur economic activity which requires growth.
The central bank has said that Pakistan would miss the previously projected economic growth rate of 3.5 percent due to low production of agriculture crops. The GDP projection is likely to be revised downward for the current fiscal year. The elevated interest rate would help to retain money in the banks, but more efforts are required to tame inflation which can provide relief to the economy.