Stronger-than-expected demand growth led to policy rate hike: SBP governor

State Bank of Pakistan Governor Dr Reza Baqir has said that the Monetary Policy Committee (MPC) decided that the time had come to begin tapering, after Pakistan’s stronger-than-expected demand growth and a sense that the government had been successful in controlling the delta variant of the coronavirus.

Talking to CNBC, days after the central bank's MPC decided to hike its policy rate by 25 basis points to 7.25% for the next two months, Baqir said that the committee decided that the time had come to begin the process of tapering the considerable amount of monetary stimulus that the central bank has injected into the economy during Covid-19.

At this meeting of the MPC, there was a sense that the government had been quite successful in controlling the spread of the variant and therefore a risk to demand from that variant were limited: SBP Governor Dr Reza Baqir

“Compared to the last meeting two months ago, there were two new developments for the MPC — one was that the demand growth was stronger than previously anticipated. Imports, for example, grew 85% year on year and 11% month on month in August,” said Baqir.

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The central bank chief said that the second key development in this meeting was that earlier, the MPC was concerned about how the Delta variant might impact Pakistan's economy. “However, at this meeting of the MPC, there was a sense that the government had been quite successful in controlling the spread of the variant and therefore a risk to demand from that variant were limited.”

Baqir said that the MPC thus concluded that the economic recovery underway in Pakistan was at a “more mature stage and therefore a greater emphasis is needed to ensure that there is a proper policy mix that entails a gradual reduction in the accommodation from the monetary policy side, and this is needed to protect the longevity of growth, to keep inflation expectations and also to ensure the current account deficit that has began to grow due to the economic recovery remains at sustainable levels.”

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Talking about the US Fed tapering and its impact on Pakistan, the SBP governor said that its timetable would impact Pakistan through the entire asset class of high yielding emerging markets.

He said that the central bank is looking primarily at the extent to which high commodity prices in the international markets of oil, food and other may impact inflation in Pakistan beyond a “transitory manner.”