SBP keeps benchmark interest rate unchanged at 7% for fourth time.

KARACHI: The State Bank of Pakistan (SBP) on Friday kept the benchmark interest rate unchanged at 7% for the fourth time, while viewing growth and inflation expectations as well-anchored although, it said, Covid-19 still poses challenges to the economic outlook.

A meeting of the Monetary Policy Committee (MPC) decided to maintain the policy rate at 7% as it noted that since the last meeting in January, growth and employment have continued to recover and business sentiment has further improved. While still modest, at around 3%, growth in FY21 is now projected to be higher than previously anticipated due to improved prospects for manufacturing and reflecting in part the monetary and fiscal stimulus provided during Covid-19, the SBP said in a statement.

The SBP said on the inflation front, recent out-turns have been volatile, with the lowest reading on headline inflation in more than two years in January 2021 followed by a sharp rise in February. According to the SBP estimates, the recent increase in electricity tariffs and sugar and wheat prices accounts for about 11/2 percentage points of the 3 percentage point increase in inflation between the January and February out-turns. It maintained that a recent increase in electricity prices will continue to manifest in headline numbers in coming months, keeping average inflation in FY21 close to the upper end of the previously announced range of 7-9 percent.

The MPC highlighted that the output gap is still estimated to be negative, core inflation continues to be relatively subdued, and inflation expectations are still well-anchored. The SBP said that the committee reviewed the recent rise in inflation and concluded that it was primarily driven by supply side factors and saw little signs of demand led inflation, it expects that as this temporary increase in inflation is a by-product of administered prices subsides, inflation should fall to the 5-7% target range over the medium-term.

The MPC said the...