SBP keeps policy rate unchanged at 5.75 percent

KARACHI: The State Bank of Pakistan (SBP) on Saturday kept its benchmark interest rate unchanged at 5.75 percent in line with the market expectations to lend support to economic activities.

“The upbeat economic sentiments and low interest rates have encouraged the private sector to undertake capacity expansions,” the SBP said in the monetary policy announcement for the next two months (June-July). 

The central kept the policy rate on hold since July last year.

Private sector credit posted a net expansion of Rs503 billion during Jul-Apr FY17, which is significantly higher than the uptick of Rs334 billion in the corresponding period of last year.

The SBP said real GDP growth in the current fiscal year of 2016/17 was provisionally estimated at 5.3 percent, representing a 10 year high. Specifically, the revival of domestic demand has been instrumental in the current upturn.

“The major thrust has come from the ongoing public and private investment particularly in infrastructure and power sector,” it added.

The central bank, however, said headline consumer price index (CPI) inflation edged up in the recent months following further improvement in economic activity along with pass through of the recovering global oil prices to domestic motor fuel cost.

“Going forward in FY18, current trends of rising income, surge in imports, and accelerating credit to private sector are expected to increase the CPI inflation; however, it is likely to remain within the target,” it said.

Bilal Khan, an economist at Standard Chartered Bank the SBP would 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.

The SBP said the expansion in economic activity has led to a concomitant surge in import payments during Jul-Apr FY17. On the other hand, exports have posted only a marginal recovery. Workers’ remittances also slowed down this year mainly owing to the changing labour market dynamics in the Gulf Cooperation Council region.

All these factors, it said, led to a sharp widening of the current account deficit during Jul-Apr FY17 compared to the same period last year. As the financial inflows did not entirely cover the current account imbalance, the overall balance of payments turned into deficit from a surplus in the same period last year.

It, however, said official inflows are expected to provide support to foreign exchange reserves. 

“A sustained increase in other private inflows – foreign direct investments and export earnings in particular – is required to fully finance the surge in imports,” it added. “…The current (imports) growth momentum led by China-Pakistan Economic Corridor-related investments is likely to boost foreign direct investment inflows.”

On the supply side, recovery in major crops from last year, better energy supplies, and a broad based increase in Large-scale manufacturing have facilitated consumer spending expansion.

The central bank said the supply of credit remained at ease because of the healthy growth in bank deposits and government’s reliance on central bank financing along with net retirement to commercial banks. “Also, calibrated open market operations by the SBP to manage residual liquidity demand played its part, besides keeping the overnight repo rate generally close to the policy rate,” it added. “Reflecting these developments, money supply grew by 13.8 percent (YoY) in Apr FY17 as compared to 13.0 percent (YoY) during the same month last year.”