Monetary policy: SBP keeps interest rate unchanged at 7%

In line with market expectations, the State Bank of Pakistan (SBP) on Friday maintained the status quo and left the benchmark interest rate unchanged at 7% for the next two months.

Market researchers had anticipated no change in the policy rate as the SBP had strongly hinted in January that it might maintain the rate at the current level of 7% in March for another two months and until the economy got back to full capacity.

The SBP kept the interest rate unchanged to support businesses during the second wave of the Covid-19 pandemic.

Earlier, due to the lockdown imposed to contain the spread of Covid-19 in the country, the SBP had aggressively slashed the benchmark interest rate by 625 basis points from March to June 2020 to 7%.

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 interbank market.

The policy rate is revised up or down or kept unchanged in relation to the inflation reading and economic activities. Low inflation leads to a reduction in the policy rate in a bid to ramp up economic activities and vice versa.