State Bank keeps policy rate unchanged at 5.75 percent

KARACHI: The State Bank of Pakistan (SBP) on Saturday kept the key policy rate unchanged at 5.75 percent for the next two months, citing widening current account deficit, uncertain global oil prices and increased inflation as the main reasons.  

“The year-on-year CPI (consumer price index) inflation rose to 3.6 percent in August 2016 from 1.8 percent in August 2015, while the average inflation during the first two months of the current fiscal year was more than double the same period last year,” the monetary policy committee of the central bank said in a statement. 

“Similarly, the core inflation (measured as both non-food non-energy and 20 percent trimmed mean) during this period was also higher than the last year.”

The status quo was in line with the market expectations. 

In July, the central bank also kept the policy rate unchanged at 5.75 percent after reducing it 25 basis points from six percent in May.

The rate is at the 42-year low level. 

The SBP said the foreign exchange reserves stand at the stable level. 

“Pakistan has fared well so far owing to supporting macroeconomic environment and the record-high foreign exchange reserves have supported stability in the foreign exchange market,” it said. “However, the current account deficit is at the risk of widening further owing to declining exports and rising imports.” 

The SBP projected the economy to expand further, “as China Pakistan Economic Corridor (CPEC) related projects are gaining momentum.” 

“CPEC expansion would help in improving industrial activity, especially construction and power generation and rising demand for allied services,” it said.

The central bank is expecting a surge in manufacturing activities on the back of lower import prices of inputs, soft interest rates and better energy supplies. 

“The expected pick up in domestic demand is largely going to determine the inflation path in the remaining months of FY17,” it said. 

The SBP further said improved security situation will help in attracting foreign investment, “thus adding on to the sustainability of growth.” 

The statement said liquidity conditions in the money market remained broadly comfortable mainly due to retirement of government borrowing to the scheduled banks.

“Resultantly, volatility in the interbank market was low as the overnight money market repo rate mostly remained close to the policy rate,” it added.

“Thus, the ongoing stability in the market interest rates, with weighted average lending rates already at 12-year low in July 2016, is going to be instrumental during the start of the upcoming credit cycle for working capital and also for fixed investment.”

The SBP said global growth outlook for 2016 is subdued and trend in international oil prices remains uncertain.

“Uncertain global oil price continues to remain a major determining risk,” it added.