SBP has increased interest rate by 150 basis points (bps) to 12.25 per cent from 10.75 per cent effective from May 21, 2019.
KARACHI: The State Bank of Pakistan (SBP) has increased interest rate by 150 basis points (bps) to 12.25 per cent from 10.75 per cent effective from May 21, 2019.
The SBP increased the policy rate while announcing its monetary policy for next two months.
The State Bank, in its monetary policy statement, said “there have been three notable developments since the last Monetary Policy Committee (MPC) meeting in March 2019. First, the government of Pakistan has reached a staff-level agreement with the International Monetary Fund for 39-month long Extended Fund Facility of around $ 6 billion. The program is designed to restore macroeconomic stability and support sustainable economic growth, and is expected to unlock considerable additional external financing. Second, trends in government borrowing reflect a widening fiscal deficit during the first nine months of FY19 when compared to the same period in FY18. In addition, a greater reliance on central bank financing of the deficit has acted to dilute the impact of previous monetary tightening. Finally, since the last MPC, the exchange rate has depreciated by 5.93 percent to PKR 149.65 per USD, at the close of 20th May 2019, reflecting a combination of underlying macroeconomic factors and market sentiment considerations.”
SBP’s estimates show that economic growth is expected to slow in FY19 but rise modestly in FY20. This slowdown is mostly due to lower growth in agriculture and industry.
Going forward, some gradual recovery in economic activity is expected on the back of improved market sentiment in the context of the IMF supported program, a rebound in the agriculture sector and government incentives for exportoriented industries.
In SBP’s view, the recent movement in the exchange rate reflects the continuing resolution of accumulated imbalances of the past and some role of supply and demand factors. SBP will continue to closely monitor the situation and stands ready to take measures, as needed, to address any unwarranted volatility in the foreign exchange market.
The government borrowed Rs 4.8 trillion from SBP during 1st Jul to 10th May FY19, which is 2.4 times the borrowing during the same period last year. A major portion of this borrowing from the SBP (Rs 3.7 trillion) reflects a shift away from commercial banks which were reluctant to lend to the government at prevailing rates, the statement said.
Taking into account the above considerations and the evolving macroeconomic situation, the MPC noted that further policy measures are required to address underlying inflationary pressures from (i) higher recent month-on-month headline and core inflation outturns; (ii) recent exchange rate depreciation; (iii) an elevated fiscal deficit and its increased monetization, and (iv) potential adjustments in utility tariffs. In this context, the MPC decided to increase the policy rate by 150 bps to 12.25 percent effective from 21st May 2019.