Daily Times

KARACHI: State Bank of Pakistan (SBP) Governor Ashraf Mehmood Wathra announced on Saturday a new monetary policy for the next two months.

Addressing a press conference, SBP Governor Ashraf Wathra said the target rate will be 5.75% for August-September.Earlier in May, the interest rate was slashed by 25 basis points around 6% to 5.75%.

Earlier in May, the interest rate was slashed by 25 basis points around 6% to 5.75%. The SBP announces a target rate every two months, which serves as the benchmark interest rate for overnight funds in the interbank market. It is one of the tools that the central bank uses to ensure price stability in the economy.

Decreasing the target rate poses the risk of high inflation, but also stimulates economic growth by making credit cheaper. In contrast, raising the target rate restricts the level of liquidity, which subdues consumer prices in the economy.

The central bank tries to strike a balance by targeting the overnight cost of funds at a level that promotes maximum economic growth without causing high inflation.

The newly established Monetary Policy Committee (MPC), which is headed by the SBP governor and includes three independent economists as external members, takes the decision to revise or maintain the target rate after taking into account factors like anticipated inflation, foreign exchange reserves, commodity prices, etc.

The MPC had reduced the target rate by 0.25% in its last announcement in May. The move had surprised most analysts, as the SBP itself stated at the time that it was expecting inflation to “attain a higher plateau.”

Yet eight of the nine MPC members ended up favouring a rate cut, although each of the 22 analysts polled by Bloomberg in May expected a no-change announcement.

SBP Governor Ashraf Wathra told Bloomberg on Thursday the MPC will be “cautious this time making a move either way” given the possibility of an increase in inflation.

SBP kept its key policy rate unchanged at 5.75 percent on Saturday, citing steady remittances and low oil prices. SBP Governor Ashraf Mahmood Wathra also told a news conference that foreign direct investment is projected to increase as work on projects under the $46 billion China Pakistan Economic Corridor gains momentum.

In the previous Monetary Policy Statement in May the interest rate was reduced by 25 basis points from 6 per cent to 5.75 per cent. The SBP announces a target rate every two months, which serves as the benchmark interest rate for overnight funds in the interbank market. It is one of the tools that the central bank uses to ensure price stability in the economy.