Pakistan keeps key interest rate unchanged at 7% - central bank

Continued economic recovery

An employee hands over a bundle of Pakistan rupee banknotes.

An employee hands over a bundle of Pakistan rupee banknotes.

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KARACHI/ISLAMABAD, Pakistan- Pakistan's central bank on Tuesday kept its key interest rate on hold at 7%, saying it was encouraged by a continued economic recovery and an improved inflation outlook in the country.

The announcement, the first monetary policy statement of the new fiscal year, is part of a regular two-month policy cycle, but comes as Pakistan deals with some inflationary pressures and the beginning of a fresh rise in COVID-19 infections, dominated by the Delta variant.

The monetary policy committee of the State Bank of Pakistan decided that if there was any need to raise or adjust rates going forward, it would be done gradually, the bank's Governor Raza Baqir told a press briefing in Karachi.

Tuesday's announcement is the sixth time Pakistan has kept its rate at 7% since cutting it by 625 basis points, down from 13.25%, when the global pandemic hit its economy last year.

In a statement following the announcement, the central bank said it expects monetary policy to remain accommodative in the near term and that it was encouraged by a continued domestic recovery and an improved inflation outlook.

"If signs emerge of demand-led pressures on inflation or of vulnerabilities in the current account ... it would be prudent for monetary policy to begin to normalize through a gradual reduction in the degree of accommodation," the statement said.

The key downside risk stems from the resurgence of COVID-19 infections associated with new strains of the virus, amid low vaccination rates, the bank stressed.

The bank said Pakistan’s external position was at its strongest in several years, and, based on expectations of sustained remittance levels and an improving exports outlook, the current account deficit is expected to move towards 2% to 3% of GDP in the current 2021-22 financial year.

In March, the current account deficit fell to 0.6% of GDP - the lowest in a decade.

Foreign exchange reserves rose by $5.2 billion in the last fiscal year to $17 billion, or around three months of imports - a four-year high, the bank said.

"In August, Pakistan’s reserve buffers are expected to rise by another $2.8 billion through the IMF’s planned new global SDR allocation," the statement said.

(Reporting by Syed Raza Hassan in Karachi and Gibran Peshimam in Islamabad; Editing by Alison Williams and Giles Elgood) ((; +923018217003;))

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