SBP leaves interest rate on hold at 5.75pc as widely expected

KARACHI: The State Bank of Pakistan on Saturday held its benchmark interest rate steady at 5.75 percent, as expected, citing the need to further boost economic growth in a muted inflationary scenario.

The central bank kept the policy rate unchanged for the fourth consecutive time. The bank cut the interest rate to the current level in May last year.

The bank said average inflation clocked in at 3.9 percent during the first half of the fiscal year of 2016/17, lower than the earlier projections due to smooth supply of perishable items, stable exchange rate, and government’s absorption of the impact of higher international oil prices.

“The current trends suggest that the actual inflation would be lower than the target rate of six percent in 2016/17,” SBP’s Governor Ashraf Mahmood Wathra said, unveiling the monetary policy decision for the January-February period.

 “Based on an assessment of the developments and after detailed deliberations, the monetary policy committee has decided to keep the policy rate unchanged.”

The bank viewed stability in international oil prices in the short- to medium-term, however, it would remain vigilant “to see how the international market will behave in the next six months.”

The central bank projected the growth rate between five to six percent for the current fiscal year in line with the finance ministry’s target of 5.7 percent. The growth rate was recorded at 4.7 percent – the highest rate in the past eight years – for the last fiscal year of 2015/16.

The World Bank increased its growth forecast for Pakistan to 5.2 percent for fiscal year 2017, 0.7 percent up from its earlier projection, while International Monetary Fund projected the GDP growth rate at five percent for the current fiscal year.

The SBP’s committee said healthy credit expansion, along with higher production of Kharif (summer) crops, visible improvements in energy supply and upbeat business sentiments, “signal recuperating real economic activities.”

“Large-scale manufacturing grew 3.2 percent during the first five months of the current fiscal year and further increase is expected on account of growing infrastructure spending and recent policy support for export-oriented sectors,” the bank said in a policy statement.

The assumption of rise in domestic demand and economic activity is supported by Rs180 billion worth of exports incentive package, recently announced by the government, for the struggling exporters.   

The central bank, however, sees risks to current account position if foreign inflows run short of supply.

“Growing CPEC (China-Pakistan Economic Corridor) -related imports, decline in exports, absence of coalition support fund, and slowdown in remittances pushed the current account deficit to $3.6 billion in the first half of FY17, from $1.7 billion in the same period last year,” it said. “This higher deficit was financed by an increase in bilateral and multilateral funding along with pickup in investment flows. Overall surplus in the balance of payments stands at $0.2 billion in the first half of the current year.”  With the aforementioned risks to the external sector, the need of financial inflows would grow further, it added.

The SBP’s governor said capital goods, including machinery and plants, were the major catalyst to imports. He, however, said such imports would result in rising productivity.

The governor sees remittances to reach more than $20 billion during the current fiscal year.

The SBP said soft interest rate, couple with a sizeable net retirement of government borrowing to scheduled banks and an increase in bank deposits, helped increase private sector credit.

“Benefiting from the historic low interest rates, private businesses are actively borrowing from the banking sector for upgrading and expanding their business processes,” the SBP’s statement said. “Private sector borrowed Rs375 billion in first half of FY17 as compared to Rs282.6 billion availed in the corresponding period of last year.”  

The SBP said loans for fixed investments increased Rs134.1 billion in the first half of 2016/17 compared with an expansion of Rs83.8 billion in the same period of last year. “Demand for consumer financing, especially for auto loans, also gathered pace during the first half of the year,” it added.