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Business

May 20, 2017

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SBP may leave policy rate unchanged

SBP may leave policy rate unchanged

KARACHI: The State Bank of Pakistan (SBP) may leave the benchmark interest rate unchanged during its bi-monthly monetary policy meeting scheduled for Saturday (today) as weak current account position needs a buttress to keep growth stable, analysts said on Friday.

“With rising debt servicing cost and slow growth in external inflows in prospect, we think interest rates to stay on hold,” said Hafiz Pasha, an ex-minister for finance.     “I would be surprised if the MPC (monetary policy committee) hike the rates due to political pressures being faced by the government,” Pasha added.  

Current account deficit sharply swelled over 200 percent to $7.2 billion for the 10-month period of 2016/17.     The SBP kept the policy rate on hold at 5.75 percent in the last monetary policy announcement in March. The previous rate cut was in May last year.

“We expect the State Bank of Pakistan to hold its policy rate at 5.75 percent on May 20, but to flag external account concerns in its policy statement, highlighting the need for greater financial flows,” said Bilal Khan, an economist at Standard Chartered Bank in a report.  Analysts said bright official growth figures are in contrast to more alarming data of balance of payments.

Internally, the economy is performing better with much impetus coming from industrial and services sectors. Large scale manufacturing sector grew 10.46 percent year-on-year in March – the highest growth recorded in the past few years.  However, the country is expected to miss the growth target of 5.7 percent set by the government for the current fiscal year. The growth is expected at 5.2 percent.   

Analysts said the monetary policy committee would be united in keeping the policy rate flat at 5.75 percent for the next two months due to some bad signals with regard to balance of payments and inflation.      

Consumer price index inflation rose to 4.8 percent in April from 4.2 percent in the same month a year earlier. The SBP’s consumer confidence survey for March showed that while overall expectations remain anchored, more households expected higher food and energy prices over the next six months than in the previous survey in January.

Khan said the monetary policy committee turned more cautious during the last meeting where its members voted to maintain the status quo as well as for 25 basis points cut. “We maintain our call that SBP will gradually shift to a tightening stance by September 2017 particularly as the real policy rate – adjusted for core (non-food, non-energy) inflation – approaches zero,” he added.  

“We have long argued that domestic demand is strong,” he said. “GDP is estimated to grow at 5.28 percent in FY17, according to preliminary data, up from 4.5 percent in FY16.”  Khan said higher growth caused the current account deficit to register an unprecedented growth in July-April FY 17.

Though a wider current account deficit is to be expected with the China-Pakistan Economic Corridor being implemented, the accompanying decline in the SBP’s foreign exchange reserves is likely to a concern for the central bank.

 

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