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September 17, 2019

SBP holds interest rate at 13.25pc, maintains cautious stance


September 17, 2019

KARACHI: The central bank kept its benchmark interest rate on hold at 13.25 percent on Monday as expected, noting that inflation risks are roughly balanced amid ‘a gradual slowdown’ in growth but key economic indicators had begun to improve since July policy decision.

“The decision reflected the MPC’s (monetary policy committee) view that inflation outcomes have been largely as expected and inflation projections for FY20 have remained unchanged since the last MPC meeting on 16th July, 2019,” the SBP said in a statement. “The MPC also viewed that based on available information the current stance of monetary policy was appropriate to bring inflation down to the target range of 5 – 7 percent over the next twenty-four months.”

The SBP expected inflation to average 11 to 12 percent for the current fiscal year of 2019/20. The SBP said inflation outlook could face risks from fiscal slippages.

“On the one hand, inflation could rise above the baseline projections in case of fiscal slippage or other adverse developments,” it said. “On the other hand, inflation could begin to fall earlier than expected if oil prices decline, aggregate demand slows faster than expected, or the exchange rate appreciates.”

The SBP said the policy decision reflected two key developments since the last monetary policy meeting – that saw a seventh straight increase in the benchmark interest rate by cumulative 750 basis points since January 2018.

“First, the interbank foreign exchange market had adjusted relatively well to the introduction of the market-based exchange rate system. The initial volatility and associated uncertainty in the exchange market had subsided. Reflecting these improved sentiments and continued adjustment in the current account, the rupee had strengthened modestly against the US dollar since the last MPC, unlike its previous trend,” the SBP said. “Second, on the external front, the US Fed, as anticipated, reduced its policy rate by 25 basis points (bps), followed by policy rate cuts by other major central banks around the world. This would help in lowering pressures on emerging markets’ currencies and potentially increase financial inflows.”

The SBP said the external sector continued to show significant improvement with a sizeable reduction of around 32 percent (or 1.5 percent of GDP) in the current account deficit during the last fiscal year. “Specifically, driven by an encouraging 11 percent growth in exports and a contraction of 25.8 percent in imports, the current account deficit declined to $579 million in July 2019 compared to $2,130 million in the same period last year,” it added. “This, together with the disbursement of program related inflows and activation of the Saudi oil facility, helped to build SBP’s foreign exchange reserves, which as of 6th September 2019, stood at $8.46 billion. This is an increase of around $ 1.18 billion from the end-June FY19 level. The improvements in the balance-of-payments and market sentiment allowed SBP to reduce its forward short liability position and hence increase its net international reserves.”

The SBP said economic activity would gradually turn around as business sentiment improves. “Recent economic activity indicators show a gradual slowdown, in line with earlier expectations, and the MPC continued to expect average growth in FY20 of around 3.5 percent. The slowdown is more pronounced in domestic oriented industries such as automobiles and steel,” it added. “The agriculture sector growth is expected to improve considerably in FY20 over the last fiscal year while growth in services is expected to moderate gradually.” The SBP said fiscal prudence and meeting the program targets is essential to sustaining the improvement in macroeconomic stability.

“Revised figures showed that fiscal policy had been considerably more expansionary in FY19 than earlier expected with a primary deficit of 3.5 percent of GDP and an overall fiscal deficit of 8.9 percent of GDP,” it added. “Tax revenues (net of refunds) had grown considerably in July and August of FY20 which suggested that the economic slowdown may not be as pronounced as may have been feared.”

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