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State Bank leaves key policy rate unchanged at 5.57 percent

By Erum Zaidi
November 27, 2016

KARACHI: The State Bank of Pakistan, in line with market expectations, on Saturday left the key policy rate unchanged at 5.75 percent for November-December period, even though it said inflation showed a rising trend.

 “… The Monetary Policy Committee (MPC) has decided to maintain the policy rate at 5.75 percent,” the central bank said in a monetary policy statement.  

The central bank said expected increase in global oil prices and upturn in domestic demand are likely to keep inflation high in coming months.  It also feared that uncertainty about foreign inflows could pose threat to current account.       

The SBP maintained a status quo in interest rates since the start of current fiscal year of 2016/17. It reduced policy rate by 25 basis points in May 2016. The policy rate has seen a cumulative 75 bps slash during last fiscal year; over and above cut of 300 bps in FY15.

The central bank said the consumer price index (CPI) inflation has been following a rising trend with sporadic seasonal diversifications after bottomed out in previous month.  

“The anticipated rise in inflation is explained by stability in commodity prices against earlier sharp decline, phasing out of second-round impact of oil prices, and some uptick in domestic demand,” the statement said. M “The year-on-year CPI inflation has increased from 1.6 percent in October 2015 to 4.2 percent in October 2016 and core inflation is inching upwards as well.”  

The statement said an IBA-SBP survey of November 2016 showed that improvement in current and expected economic conditions along with a moderate rise in consumer confidence and inflation expectations for the next six months.    

The central bank however sees manageable inflationary environment over the near-term bodes well for the current growth momentum.

“A healthy uptick in private sector credit for fixed investment will further support future growth. Consequently, improving aggregate supply is expected to better cater to rising domestic demand in FY17.” It added. “However, international oil price movements may impact inflation.”

The SBP sees mixed outlook for the global growth during the current year. “While growth prospects for the US economy remain positive, uncertainties exist for international financial markets and global trade amid anticipated interest rate hike by the US-Fed,” it said.

Nonetheless, Pakistan’s continuous buildup of external buffers over the last three years has improved its resilience against external uncertainties.  

“This is reflected in the current level of foreign exchange reserves which cover more than four months of projected import payments,” it added

“In addition, the recent improvement in Pakistan’s sovereign rating along with official financial inflows is projected to sustain its foreign exchange reserves. However, unpredictability of non-trade flows will influence the current account in particular and the external sector in general during the rest of FY17.”

The current macroeconomic stability and net retirement of government borrowings from scheduled banks resulted in relatively easy liquidity conditions in the money market.

Some support also came from increase in bank deposits as the growth in currency in circulation receded back to its past levels after rising exceptionally high in FY16.

Volatility in the interbank market continued to remain low and the overnight money market repo rate stayed close to the policy rate in the post September 2016 monetary policy period.

Little change in growth and inflation dynamics and surge in current account deficit removed the need for a rate cut, economists said but some expected monetary tightening by the start of next year.    

They believe although inflation remains subdued, but it could to rise gradually. The SBP has so far maintained the status quo given growing FX reserves. However, the SBP is likely to shift from its ‘hold’ stance to gradual tightening as the global environment turns increasingly uncertain and the current-account deficit widens.  The current account deficit is expected to widen to 2.1 percent of gross domestic product in FY17.