The State Bank of Pakistan (SBP) left the benchmark interest rate unchanged at 7% for the next two months.

The decision taken by the central bank’s Monetary Policy Committee (MPC) was largely in line with market expectations, as the policy rate remains an effective tool with the central bank to curb inflation.

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. As a result, there are upside risks to the current growth projection of slightly above 2% in FY21.

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% for FY21 and trend toward the 5-7% 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.

Earlier, in a bid to deal with the fallout from the Covid pandemic, the central bank slashed the policy rate by a significant 625 basis points during the period of March and June 2020.

The policy rate is revised up or down, or kept unchanged by the SBP in relation to the inflation reading and economic activities.

Low inflation leads to a reduction in the policy rate for ramping up economic activities and vice versa. The rate is left unchanged at a higher level to tone down inflation or on the lower side to support economic growth.