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November 23, 2017

Monetary policy meeting on Friday: Central bank seen holding interest rate steady to support growth

Business

November 23, 2017

KARACHI: State Bank of Pakistan (SBP) is likely to keep the benchmark interest rate unchanged in a monetary policy meeting scheduled on Friday as the economy requires a continual credit support to foster growth, analysts said on Wednesday.

But, they are worried over deteriorating external account situation that may call for a check on the expansionary approach.

“We expect the SBP to keep its policy rate unchanged at 5.75 percent,” Bilal Khan, a senior economist at Standard Chartered Bank said.

In October, inflation remained flat at 3.8 percent.

Analysts said inflation trends warrant a status quo. They foresee consumer price inflation in line with the SBP’s target of 4.5 to 5.5 percent for the current fiscal year.

But, the central bank’s policymakers expressed concerns over balance of payment situation in September’s monetary policy meeting as current account deficit sharply widened.

The current account deficit swelled 122 percent to $5.013 billion in the first four months of the current fiscal year.

“Members voting for maintaining status quo gave more weight to the need to maintain stability and support growth, while remaining (were) cautious of the weakness in external account,” the SBP said in a statement then.

“Member voting for reducing the policy rate by 15 basis points [bps] was of the view that there is still a room for further reduction of the policy rate which could also indicate macroeconomic stability and strong prospects of attaining growth target with below-target inflation.”

Consequently, the monetary policy committee decided to maintain the policy rate at 5.75 percent with a majority vote of eight out of nine members and one vote for reducing the rate by 15 basis points (bps).

Alfalah Securities, in a report, forecast policy rate at 6.25 percent throughout the current fiscal year. “We expect a 150 bps increase in policy rate in the first half of next fiscal year,” the brokerage said.

A currency dealer said auction of market treasury bills on Wednesday indicated market expectations of no change in the interest rates for the next two months.

Cut-off yield on three- and six-month papers remained flat at 5.9910 percent and 6.0109 percent, respectively in the auction.

“A majority of banks are investing in instruments of less than one year tenors,” the dealer said. “In fact, the market is awaiting more clarity on the future course of interest rates in the backdrop of pressure on the external account.”

Private sector credit offtake remained encouraging in the past five months. Bank loans to the businesses rose to Rs21 billion between July 1 and November 3, SBP’s data showed.  

However, the government’s reliance on bank borrowing to finance its budget deficit also remained intact. The government borrowed Rs477 billion from the banking system during July-November as compared to Rs353 billion in the same period of last fiscal year.