The market is expecting that the State Bank will be maintaining the interest rates at the present level of 7% to keep the economy in a direction that induces growth as uncertainty persists because of the coronavirus pandemic.
According to senior research analyst Raza Jafri, the SBP is likely to keep the interest rate at the current level. “The interest rate was brought down due to the pandemic and subsequent lockdown in the country last year,” Jafri said. “Looking at the increasing Covid-19 cases, I don’t think the State Bank would increase the policy rate.”
The interest rate stood at 13.25% early last year before the pandemic wreaked havoc on Pakistan’s economy. The policy rate was then gradually brought down to 7% to help the economy grow.
Research analyst Sharoon Ahmed expressed similar views. He said that considering the coronavirus situation in the country, policymakers are likely to keep the interest rate unchanged.
The government has enforced restrictions because of the virus and this is affecting the country’s economic activities, said analyst Faizan Ahmed. In such a situation, it seems that the State Bank would avoid increasing the rate.
Economist Muzammil Aslam has, on the other hand, predicted that the central bank may opt to raise the interest rate by 25 basis points to counter inflation. He said that the pace of economic growth is projected at 3.94% which may lead the bank to increase the rate slightly. The inflation has trickled to 11.1%.
Senior research analyst Ahmed Lakhani said that it was highly unlikely that the State Bank would change the policy rate but there is a remote chance that we see something dramatic. “The government can take a risk and announces a cut. It will be interesting to see how the market reacts. A cut in the policy rate would suggest a pro-economic growth stance. Even a 0.25% (25 basis points) cut could provide stimulus to market activity as it will show government’s pro-economic growth mindset,” he added.
Monetary policy is announced six times a year. The next monetary policy will be announced tomorrow, followed by July 27, September 20, and the last monetary policy will be announced on November 26.
What role does the policy rate play in Pakistan’s economy?
Controlling inflation and ensuring economic stability are two of the State Bank’s core functions. To achieve these goals, the central bank uses, among other tools, its policy rate. This is the rate at which commercial banks borrow money from the central bank’s discount window.
The rate, revised every two months, affects every interest rate in the market. In other words, a higher policy rate means commercial banks will charge more, making borrowing more expensive for individuals, businesses, and the government.
