Central bank abandons positive real interest rate goal: SBP governor

• "We feel that is no longer necessary and real interest rates are appropriate," Reza Baqir says.
• SBP governor says “because fiscal policy is helping monetary policy, it allows us to do less on real interest rates".
• Pakistan’s current real interest rates are in negative territory following a spike in retail inflation to 12.3% in Dec.

State Bank of Pakistan (SBP) Governor Reza Baqir on Tuesday said that country’s central bank has abandoned its goal of moving real interest rates into positive territory after the government tightened its fiscal policy settings, Bloomberg reported.

Referring to the government’s move to broaden its tax base and lower the budget deficit, Baqir said: “We feel that is no longer necessary and real interest rates are appropriate.”

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

Real interest rate is central bank’s benchmark interest rate minus year-on-year rate of consumer price inflation are in negative territory.

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

The SBP had increased the key policy rate by a cumulative 275 basis points from September to December 2021 to 9.75% to control the rising inflation and narrow the widening current account deficit, while economic activities remain healthy.

Shedding light on this increase, Baqir said that more raises aren’t needed at the moment “given the good coordination between fiscal and monetary policies.”

According to Federal Minister for Finance and Revenue Shaukat Tarin, Finance (Supplementary) Bill 2021 approved in the National Assembly will raise Rs343 billion ($1.95 billion) in taxes.

The measure, along with the approval of another move for SBP’s autonomy, is a precondition for reviving an International Monetary Fund (IMF) loan programme.

“Such fiscal and monetary coordination for emerging markets is very important for both managing inflation expectations as well as to keep a good outlook for growth,” Baqir said.

In line with market expectations, Pakistan’s central bank on Monday maintained the status quo and left the benchmark interest rate unchanged at 9.75%% for the next two months to lower inflation and keep the ongoing economic recovery sustainable.

Moreover, the SBP expects inflation to average between 9%-11% in the year to June, and move toward its target of 5%-7% next year. It sees gross domestic product growth easing to 4.5% this fiscal year from close to 5% seen previously.