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‘SBP to pause interest-rate increases to preserve economic recovery’

SBP - 'SBP to pause interest-rate increases to preserve economic recovery'

ISLAMABAD: State Bank of Pakistan (SBP) Governor Reza Baqir has said that the central bank will pause interest-rate increase to preserve economic recovery after delivering Asia’s boldest hikes since September.

In an interview with Bloomberg, Baqir said, “We are going to take a pause to first look at the effects of the tightening we have already done…Fiscal policy has been very complementary and is also withdrawing stimulus so a coordinated macroeconomic response, we think, will be number one to sustain recovery and keep inflation broadly in check.”

A wider current-account deficit, faster inflation and stronger economic growth are factors that could get the State Bank of Pakistan to resume its rate hike journey, he said. Despite the rate increases, Baqir expects the economy to grow 5 percent in fiscal year ending June, after expanding 4 percent a year ago.

The SBP has raised rates by a cumulative 275 basis points in three moves since September to tame the region’s fastest inflation and check a larger-than-anticipated gap of $5 billion in the November print of current account — the broadest measure of trade.

That’s taken a toll on the rupee, which has been the worst performer for the past six months among 13 Asian currencies tracked by Bloomberg. The pressure on the rupee is going to dwindle once demand drops, Baqir said.

Baqir said the extent of the weakening has been “overstated” and the pressure on the rupee will ease as demand for the dollar falls in the local market “The recent weakening of the rupee, which is about 10% since this calendar year, overstates the extent of the weakening because we transition from a fixed exchange rate to a market-based exchange rate system in June 2019,” he said.

He believed that this economic recovery and the global developments including recoveries around the world, and supply chain disruption have caused a sharp hike in global commodity prices which has pushed up current account deficit as well as inflation in Pakistan. “We estimate the 60 to 70 percent increase in current account deficit is due to the global commodity prices,” he stated.

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