In line with market expectations, the State Bank of Pakistan left the benchmark interest rate unchanged at 9.75% for the next one and half month on Monday.

The market had expected status quo in the interest rate after high ranking officials from the central bank reiterated that they would hold the rate in the medium-run and wait for responses to come against the measures taken so far.

Stability in the rate does not mean the current cycle of the rate hike has come to an end and there is still room available for another hike of 50-100 basis points in second half (Jan-Jun) of fiscal year 2022.

Conflicting movements in economic indicators suggest that the worst is yet to come but still the market had developed consensus that the policy rate would remain unchanged.

Despite monetary tightening, the State Bank of Pakistan (SBP) estimates that the inflation reading and current account deficit would remain high in the current fiscal year compared to its previous projections.

Accordingly, it revised up its estimates for inflation to 9-11% in December 2021 for full fiscal year compared to earlier projection of 7-9%. It also revised up the estimate for the current account deficit to 4% of GDP (gross domestic product) for the fiscal year against 2-3% of GDP anticipated earlier.

Owing to the lockdown imposed to contain the spread of Covid-19 in the country in March 2020, the SBP had aggressively slashed the benchmark interest rate by 625 basis points from March to June 2020 to 7%. However, the central bank raised it to 9.75% during September-December 2021 to control rising inflation and narrow down the widening current account deficit.

In its monetary policy announcement on November 19, the State Bank of Pakistan increased the number of annual monetary policy meetings to eight from six.

The monetary policy is an effective tool with the central bank that is used to curb inflation. The SBP announces a target rate every two months, which serves as the benchmark for overnight funds in the inter-bank market