SBP maintains key interest rate with inflation set to pickup

Policy rate on hold at 6 percent

KARACHI:  The State bank of Pakistan on Saturday kept its benchmark interest rate unchanged for a third meeting as the bank signaled its stance to tackle an expected pickup in inflation and ease pressure from the country's languishing currency.

The central bank held its key interest rate steady at 6 percent as widely expected at its policy review meeting. The bank revised down the policy rate to the multi-year low in September 2015, whereas it kept the rate unchanged in the subsequent monetary policies in November 2015 and January 2016.

 “After bottoming out in September 2015, both the Year-on-Year headline CPI (consumer price index) and period average inflation are on a rising trend,” the bank, in a statement, said. “… this rise in inflation was anticipated and the benign inflation outlook for the remaining months of FY16 remains largely unchanged.”

The consumer inflation inched up 0.15 percent in March mainly due to the low-base effect. However, the CPI reading was 3.94 percent year-on-year in March as compared to 2.49 percent in the same month last year.

The central bank said average inflation increased from 1.7 percent in September 2015 to 2.6 percent in March 2016.

“Similarly, the YoY core inflation measures kept their increasing trends. Non-food-non-energy inflation increased for the fifth consecutive month and the trimmed mean for the third month,” it added.

The SBP expects average inflation to remain between three percent and four percent during the current fiscal year, which will be far below the annual target of six percent. 

The banks aid rising inflation indicates pickup in aggregate demand, amid both improved security situation and real incomes.  It sees an increase in the private sector credit uptake by the end of the current fiscal year on positive consumer sentiments and soft lending rates.

“This is reflected in rising demand for consumer durables, acceleration in construction activities, and expansion in services sector,” the bank said. “Further, uptick in credit to private sector, mainly owing to lower cost of borrowing, also supports this.”

Bloomberg reported that the rupee is among Asia’s worst-performing currencies this year, “depriving Pakistan of the chance to follow neighbour India into more monetary easing.”

The SBP, however, said both money and foreign exchange markets exhibited relative tranquility in recent months and soft oil prices, better inflow of remittances, and calmer international capital markets improved sentiments in the foreign exchange market.

“As a result, in post January 2016 monetary policy period, the rupee has remained stable in the interbank market,” the bank said.

It added the market’s liquidity requirements increased because of continuing trend in retirement of the government debt from the SBP through enhanced borrowing from scheduled banks and higher private sector requirements.

“The weighted average overnight repo rate, however, stood at three basis points above the policy rate in post January 2016 monetary policy period compared to being 21 basis points above in the post November 2015 monetary policy period,” it said.

The central bank said the budget deficit remained manageable in the first six months of the current fiscal year despite an increase in development expenditures. “The improvement came from containment of current expenditures and sharp increase in tax revenues,” it added.

The SBP expressed its concerns on declining exports. Trade balance in July-February 2015/2016 was at the same level of last the fiscal year despite pickup in quantum of oil machinery imports, it said.