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UPDATE 1-Pakistan central bank holds interest rate at 7% as outlook improves

(Adds details, quotes from central bank statement, analyst)

KARACHI, Sept 21 (Reuters) - Pakistan’s central bank held its benchmark policy rate at 7% on Monday, saying the economy looked set to pick up due to the lifting of lockdown restrictions aimed at curbing the coronavirus pandemic though risks remained.

“Business confidence and the outlook for growth have improved,” the State Bank of Pakistan said in its monetary policy statement. “This reflects the decline of COVID-19 cases in Pakistan and the easing of lockdowns.”

The central bank had slashed rates by 625 basis points in the three months to June, the most pronounced cuts in its history, as the pandemic hit the South-Asian nation.

The bank said that economic growth was expected to pick up to around 2% in the financial year 2021, compared to a contraction of 0.4% in the year ended June.

The decision was largely in line with expectations that the bank would ease off its dovish stance due to the rosier economic outlook while being mindful of the risks to inflation, which had ticked higher in June and July after it cut rates.

“As expected rates remain unchanged, (the) SBP highlighted risks to inflation while economic recovery this year can lead to GDP growth of more than 2%,” said Mohammad Sohail, head of Topline Securities.

However, progress was expected to be patchy with construction and manufacturing driving growth in part due to central bank incentive policies, and remittances holding up despite global economic uncertainty.

Hospitality was expected to remain weak and the bank cautioned there heightened risks remained on the horizon due to the pandemic.

“Risks include a potential second wave of COVID-19 domestic infections, a possible sharp increase in infections...in Pakistan’s major export markets in Europe and the U.S. and the threat to agriculture from locust attacks,” the bank said. (Reporting by Syed Raza Hasan; Additional reporting and writing by Charlotte Greenfield; Editing by Alex Richardson and Toby Chopra)

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