Rupee slide continues

March 31,2018

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KARACHI: The State Bank of Pakistan (SBP) kept key interest rate on hold on Friday, defying predictions of hike, signalling its intention to wait and see till the next months the impact of recent rupee devaluation on the otherwise subdued inflation in a stable economy.

“Following detailed deliberations, the monetary policy committee… (viewed) that some time may be allowed for the impact of recent policy developments to unfold and has therefore decided to maintain policy rate at 6 percent for the next two months,” the SBP said in a monetary policy statement. Analysts were expecting at least 25 basis points increase in interest rate due to weak rupee that lost nine percent since December last and its subsequent cause in inflation uptick.

Mohammad Sohail, chief executive officer at the Topline Securities, said the central bank is “delaying the inevitable. It has to raise the interest rate to arrest external account pressure.”

The central bank said consumer price inflation remained moderate during January-February of FY2018, averaging 4.1 percent mainly, because of subdued food prices and lower than anticipated increase in house rents.The core inflation (non-food-non-energy inflation) remained at 5.2 percent during the first eight months of the current fiscal year from 5.5 percent year on year in December last year.

“Going forward, sticky core inflation along with a moderate outlook of food prices amid abundant grain stocks and the recent increase in policy rate are expected to contain average inflation well below the FY18 target of 6 percent and close to it for FY19,” the bank maintained.

The SBP said the current account deficit reached $10.8 billion during Jul-Feb FY2018, which is about 50 percent more than it was during the same period in FY2017 due to high import growth despite “higher regulatory duties and exchange rate movements”.

The bank, however, warned that the financing of the high current account deficit is challenging as a healthy growth in foreign direct investment and higher official inflows were insufficient to finance it completely, “although the full impact of recent exchange rate depreciations on exports and imports is going to unfold gradually in the coming months”.

“Going forward, along with a focus on narrowing the current account gap, government’s plans to timely mobilise external inflows, both official and commercial, will play a pivotal role in maintaining adequate level of SBP’s foreign exchange reserves and anchoring sentiments in the foreign exchange markets.”

SBP’s foreign exchange reserves declined to $11.78 billion as of 22 March 2018. It said exports grew 12.2 percent in the first eight months of the current fiscal as compared to a 0.8 percent decline in the same period a year earlier.

“Improved demand from major trade destinations and the government’s ongoing export package are generating the momentum of growth for Pakistan’s exports.” SBP sees real sector progressing well, saying growth remains on track. “Agriculture sector, despite some shortfall in cotton production, is projected to post positive growth for the second consecutive year. Industrial sector has managed demand pressures through improved utilisation of existing capacity and continuing additions in installed capacity,” it said.

Large scale manufacturing sector that accounts for 80 percent of manufacturing grew 6.3 percent during Jul-Jan FY18 as compared to 3.6 percent during the corresponding period in FY2017.

“Due to transition of fixed investment into additional productive capacity and with favorable trend in global demand, LSM growth is expected to maintain its current momentum in the remaining months of FY18 as well,” the SBP added.

Government is expecting economic growth at 5.6 to 6 percent in the current fiscal of 2018 after achieving a decade-high growth of 5.3 percent in the previous fiscal year. SBP said government’s plan to timely mobilise external inflows, both official and commercial, “will play a pivotal role in maintaining adequate level of SBP’s foreign exchange reserves and anchoring sentiments in the FX markets.”


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