Karachi: The State Bank of Pakistan (SBP) has decided to increase the policy rate by 25 basis points to 7.25%.
The decision was made by the Monetary Policy Committee (MPC) at its Monday meeting.
The meeting pointed out that the pace of economic recovery has exceeded expectations. The strong recovery in domestic demand, coupled with rising international commodity prices, has led to a strong rebound in imports and an increase in current account deficits.
While year-on-year inflation has declined since June, rising demand pressures together with higher imported inflation could begin to manifest in inflation readings later in the fiscal year.
“The MPC was of the view that the priority of monetary policy also needed to gradually pivot from catalyzing the recovery after the Covid shock toward sustaining it,” the statement said.
This rebalancing would be best achieved by gradually tapering the significant monetary stimulus provided over the last 18 months, the MPC noted.
The MPC noted that the stance of monetary policy is still appropriately supportive of growth, with real interest rates remaining negative on a forward-looking basis. Looking ahead, in the absence of unforeseen circumstances, the MPC expects monetary policy to remain accommodative in the near term, with possible further gradual tapering of stimulus to achieve mildly positive real interest rates over time.
The meeting stated that the inflation rate dropped from 9.7% (y/y) in June to 8.4% in July and August. In addition to the favorable base effect, this decline also reflects the continued decline in energy management prices due to the reduction of the PDL and sales tax of petroleum products.
It said that the core inflation rate in urban and rural areas also fell in August. Despite this, the price trend is still relatively high, rising 1.3% month-on-month in July and 0.6% month-on-month in August.