SBP holds key interest rate steady at 6.0pc

KARACHI: The central bank held its benchmark interest rate steady at 6.0 percent on Saturday in a widely expected decision after inflation inched up in the past month.
“The Central Board of Directors of the SBP (State bank of Pakistan) has decided to keep the policy rate unchanged at 6.0 percent,” the bank said in a statement after a policy review meeting for the November-December period of the current fiscal year.
The SBP has slashed the main policy rate by 3.5 percentage points since November last year.
The discount rate or the SBP’s reverse repo rate was also kept at 6.5 percent in the third monetary policy announcement for the current fiscal year.
Analysts said the central bank had kept the interest rate on hold to support the rupee and also block expected currency-driven inflation.
The rupee has fallen almost one percent during the quarter and has lost almost four percent during the current fiscal year. According to Bloomberg, the Pak rupee is among Asia’s worst performing currencies this quarter.
The central bank said the headline inflation is expected to reverse its declining momentum. “Moreover, market surveys indicate a marginal increase in inflation expectations for the coming months.”
The bank said the average July-October FY16 inflation at 1.7 percent is lower than the 7.1 percent average inflation in the corresponding period of last year.
“The decline is broad-based as both food and non-food and core inflation measures came down in this period,” it added. The SBP sees the outlook of international oil price and other major commodity prices remain subdued and any shock to supplies of food items is unlikely to surface and average inflation would remain below the FY16 annual target of six percent.
The consumer price index inflation increased to 1.6 percent in October from a 12-year low of 1.3 percent in September.
The central bank said the current account deficit, despite a year on year 10.6 percent contraction in exports, has narrowed down to $532 million in July-October FY16 from $1.9 billion in four months of FY15. The improvement largely owes to the declining oil price – that has substantially reduced the oil import payments, healthy workers’ remittances, and the receipt of the Coalition Support Fund.
“At the back of official disbursements and Eurobond inflows, surplus in capital and financial account has supported the overall balance of payments position thus ensuring an upward trajectory in foreign exchange reserves in Jul-Oct FY16,” it added.
The SBP also believes that continued flow of external resources would be required to maintain the stable balance of payments position.
“Furthermore, realisation of investment inflows stemming from the China-Pakistan Economic Corridor would indeed strengthen the external sector outlook over the medium to long term,” the statement said.
The SBP said that large-scale manufacturing (LSM), mainly supported by food and beverages, automobiles, fertilizers, and cement production, increased to 3.9 percent in Jul-Sep 2015 compared to 2.6 percent in the same period of last year.
“Further boost to this growth is expected from expansion in cotton yarn manufacturing, strong construction activities as per planned development spending, increased automobile production encouraged by government schemes, and improving energy supply at the back of recent LNG imports,” it added. The bank said credit to private sector witnessed a nominal increase in July-October 2015; wherein fixed investments continued to expand for the fourth consecutive quarter – from Q2-FY15 to Q1-FY16. “As a result of easy monetary policy, the weighted average lending rates on fresh and outstanding loans, at 7.8 percent and 9.2 percent in September 2015, are the lowest in 10 years,” it said. “Thus, with current credit cycle now entering in uptake phase and with improving LSM growth, borrowing on account of both the working capital and fixed investment is likely to increase.”
The SBP said this outlook would reflect in broad money (M2) growth going forward, which during July 01-November 06 2015 M2 has expanded by 0.2 percent against 0.7 percent during the same period last year. “While the Net Domestic Assets declined by Rs78 billion, Net Foreign Assets contribution to M2 growth remained substantial as it increased by Rs106 billion,” it said.