SBP keeps policy rate on hold at 5.75pc with eyes on inflation

KARACHI: Central bank kept its policy rate on hold at 5.75 percent for the fifth straight meeting on Saturday, opting to wait for more clarity on the trend for rising inflation that increased at the fastest pace in almost two years.

“The Monetary Policy Committee of SBP has decided to keep the policy rate unchanged at 5.75 percent,” the State Bank of Pakistan (SBP) said in a statement issued after a policy review meeting for March-April period.    

The central bank has left its main policy rate intact at 5.75 percent since May 2016.

Analysts said the widely expected move could put some pressure on the country's languishing currency.

The SBP flagged up improvements in the economy and business sentiments, but said the inflation outlook for the next fiscal year, starting on July 1, seemed a little uncertain, as rising real incomes in a low interest rate environment since FY14 indicated signs of pick up in domestic demand, which is broadly reflected in the core inflation measures.         

The SBP said inflation expectations in the current fiscal year continue to remain well anchored. This has been largely due to the near-absence of any major supply side pressures.

“Going forward, improving consumer confidence, as depicted by IBA-SBP Consumer Confidence Survey of March 2017, indicates further increase in consumer demand,” it said.

“Hence, barring any major cost shocks, domestic demand will define the underlying trend of headline inflation in FY18.”

The consumer price inflation rose 4.2 percent in February from 3.7 percent in the previous month.  

The central bank projected inflation would hover at 4.5-5.5 percent, lower than the target rate of 6.0 percent in FY17.  

The policy statement said the country was on track to meet the target of achieving stable economic growth this fiscal year.

It said the real economic activity continues to gather pace at the back of better agricultural output, increase in key large-scale manufacturing sectors, and a healthy uptick in the credit to private sector.

“This expansion is helped by a range of factors, including low cost of inputs, upbeat economic sentiments, improved energy supplies, and CPEC related investments. As a result, the GDP growth is expected to further improve in FY17,” it said.

The SBP said prudent monetary policy stance translated well into low and stable market interest rates, which incentivised private sector to borrow from commercial banks to finance their businesses and investment activities.

Private sector credit increased by Rs349 billion during July-February FY17 as compared to Rs267 billion in the same period last year. The fixed investment category led the rise in private sector business loans by posting Rs159 billion increase during this period, compared to Rs102 billion last year.

Consumer financing too continued the uptrend in the first eight months of the current fiscal year. Improved interbank liquidity conditions also spurred the growth in private sector credit.

“This was led by both net government retirement to commercial banks and a decent increase in bank deposits compared to the withdrawals seen last year,” the statement said.

The bank said interbank liquidity was managed well with calibrated open market operations that kept the weighted average overnight repo rate close to the policy rate.

“The expansion in economic activity has also translated into significant increase in imports, which along with lack of any sustained improvement in exports and a small decline in remittances has pushed the current account deficit to $5.5 billion during July-February FY17,” it added. “While net financial flows remained higher, these were not sufficient to finance the current account deficit.”

However, accounting for positive impact of the recent policy measures to augment exports and check non-essential imports, the current account deficit may be contained in the coming months.

The policy statement also indicated some uncertainties about the prospects of the balance of payments in the fiscal year to come.   

“Also, continuation of the financial inflows, CPEC related imports, and any major fluctuation in the global oil price will determine the overall position of the external sector in FY18,” it mentioned.