KARACHI: Analysts expect that the State Bank of Pakistan (SBP) will keep the benchmark interest rate unchanged at seven per cent at the upcoming meeting of the monetary policy committee (MPC) next week.

The MPC will announce the policy rate — which is the rate at which commercial banks are allowed to borrow from the SBP on an overnight basis to meet their daily reserve requirements — for the next two months on July 27.

“The SBP might consider keeping the rate unchanged in order to boost domestic demand despite running a negative interest rate of about 3pc at present,” said a research note issued by THE Arif Habib Ltd (AHL) on Friday.

The MPC sets the benchmark rate at least six times a year in view of the prevailing economic situation. Most of the borrowing and lending activity in the economy is pegged to it. A low rate makes the availability of credit more affordable, thus galvanising the wheels of the economy. But it also poses the risks associated with an overheated economy. Central banks hike the key interest rate to curb inflation as prices rise on the back of too much money.

Decision to be made by SBP committee next week

After its last meeting in May, the MPC had noted that prices of non-food and non-energy items continued to appear restrained. “Although headline numbers have been inclining, inflation remains manageable. Moreover, inflation, as per the SBP, is likely to hover within the 5-7pc range in the medium term. Therefore, it seems likely that the central bank will let the real interest rates remain negative in the medium term,” the research note said while listing the reasons for the expected status quo in monetary policy.

Headline inflation in 2020-21 averaged 8.9pc versus 10.8pc in the preceding year. It remained in the single digit on a monthly basis — a trend that the brokerage expects to continue in coming months primarily because of a high-base effect.

The SBP has maintained the status quo since June last year after it reduced the policy rate from 13.25pc in about three months following the outbreak of Covid-19.

The AHL said a rise in international oil prices, adjustments in utility tariffs and an uptick in food inflation were key risks to its inflation expectation of 7-8pc in 2021-22. “Keeping in view the SBP’s medium-term inflation projection and its stance to support domestic demand, we expect the policy rate to remain unchanged at 7pc.”

Published in Dawn, July 24th, 2021