Central bank abandons positive real interest rate target: SBP governor

Governor of the State Bank of Pakistan (SBP), Reza Baqir. — Reuters/File
  • “We believe this is no longer necessary and real interest rates are appropriate,” says Reza Baqir.
  • The SBP governor says that “because fiscal policy helps monetary policy, it allows us to do less on real interest rates.”
  • Pakistan’s current real interest rates are in negative territory after retail price inflation spiked to 12.3% in December.

Governor of the State Bank of Pakistan (SBP), Reza Baqir, said on Tuesday that the country’s central bank had abandoned its target of pushing real interest rates into positive territory after the government tightened parameters. of its budgetary policy, Bloomberg reported.

Referring to the government’s decision to broaden its tax base and reduce the budget deficit, Baqir said, “We believe this is no longer necessary and real interest rates are appropriate.”

“Because fiscal policy helps monetary policy, it allows us to continue the pause and have to do less on real interest rates.”

The real interest rate is the central bank’s benchmark interest rate minus the annual rate of consumer price inflation which is in negative territory.

It is relevant to mention here that Pakistan’s current real interest rates follow a spike in retail price inflation to 12.3% in December.

The SBP had raised the policy rate by a cumulative 275 basis points from September to December 2021 to 9.75% to control rising inflation and reduce the growing current account deficit, while economic activities remain sound.

Shedding light on the increase, Baqir said more increases are not needed at the moment “given the good coordination between fiscal and monetary policies.”

According to Federal Finance and Revenue Minister Shaukat Tarin, the Finance (Supplementary) Bill 2021 approved in the National Assembly will raise 343 billion rupees ($1.95 billion) in taxes.

The measure, along with the approval of another SBP autonomy decision, is a prerequisite for the resumption of an International Monetary Fund (IMF) lending program.

“Such fiscal and monetary coordination for emerging markets is very important both to manage inflation expectations and to maintain good growth prospects,” Baqir said.

In line with market expectations, the Central Bank of Pakistan on Monday maintained the status quo and left the benchmark interest rate unchanged at 9.75% for the next two months to reduce inflation and maintain the economic recovery in sustainable course.

Additionally, the SBP expects inflation to average between 9% and 11% in the year through June, and near its target of 5% to 7% for the year. next. He sees gross domestic product growth slowing to 4.5% this fiscal year from nearly 5% previously.

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