SBP pol­icy rate

The Pak Banker - - FRONT PAGE -

The State Bank has raised the pol­icy rate by 100 bps to 8.5 per­cent ef­fec­tive from 1st Oc­to­ber 2018. The de­ci­sion has been taken keep­ing in view the evolv­ing eco­nomic sit­u­a­tion.An official state­ment is­sued by the Mone­tary Pol­icy Com­mit­tee says that since the last meet­ing of the MPC in July 2018, Pak­istan has wit­nessed no­table changes on the po­lit­i­cal front which have had a pos­i­tive im­pact on the busi­ness and con­sumer con­fi­dence in the coun­try. The smooth po­lit­i­cal tran­si­tion has cre­ated a sense of cer­tainty. How­ever, con­cerns on the eco­nomic front con­tinue to per­sist due to ris­ing in­fla­tion and large twin deficits that are likely to af­fect the sus­tain­abil­ity of the high real eco­nomic growth path.In­fla­tion is inch­ing up, par­tic­u­larly from March 2018 on­wards. So far, in the first two months of FY19, head­line CPI in­fla­tion has av­er­aged 5.8 per­cent as com­pared to 3.2 per­cent for the cor­re­spond­ing months of FY18, and an av­er­age of 3.9 per­cent for all of FY18.

The State Bank projects that the av­er­age head­line in­fla­tion is ex­pected to fall in the re­vised fore­cast range of 6.5-7.5 per­cent in FY19. This as­sess­ment takes stock of such fac­tors as a higher than an­tic­i­pated in­crease in in­ter­na­tional oil prices, an up­ward re­vi­sion in do­mes­tic gas prices, fur­ther in­crease in reg­u­la­tory du­ties on im­ports and the con­tin­u­ing sec­ond round im­pact of pre­vi­ous ex­change rate de­pre­ci­a­tions.Fol­low­ing a healthy growth of 5.8 per­cent in FY18, eco­nomic ac­tiv­ity is likely to slow­down in FY19 as the gen­eral macroe­co­nomic pol­icy mix is fo­cus­ing to­wards sta­bi­liza­tion.

Specif­i­cally, the trans­mis­sion of SBP's pol­icy rate hikes by 175 bps since Jan­uary 2018 is still un­fold­ing. The gov­ern­ment is also now pur­su­ing a fis­cal con­sol­i­da­tion pro­gram and has fur­ther an­nounced reg­u­la­tory mea­sures to slow­down the grow­ing pres­sures on the ex­ter­nal front. As a re­sult, do­mes­tic de­mand is pro­jected to de­cel­er­ate in the com­ing months of FY19.The re­cent mone­tary and fis­cal mea­sures are likely to af­fect Large Scale Man­u­fac­tur­ing. Fur­ther­more, the lat­est in­for­ma­tion shows that cot­ton pro­duc­tion is ex­pected to miss its FY19 tar­get of 14.4 mil­lion bales with down­side im­pli­ca­tions for agri­cul­ture sec­tor growth. But some pos­i­tive im­pact is ex­pected from the con­tri­bu­tion of ex­ports led pro­duc­tion and higher fer­til­izer pro­duc­tion amidst de­plet­ing stocks and bet­ter avail­abil­ity of en­ergy.

Af­ter in­cor­po­rat­ing the lat­est in­for­ma­tion on both de­mand and sup­ply, SBP projects the real GDP growth for FY19 at around 5.0 per­cent. The cur­rent ac­count deficit con­tin­ues to pose a chal­lenge. De­spite some growth in work­ers' remit­tances and ex­ports in the first two months of FY19, a no­table in­crease in the value of oil im­ports has kept the cur­rent ac­count deficit at US$2.7 bil­lion, as com­pared to US$2.5 bil­lion, in the cor­re­spond­ing pe­riod last year. Ow­ing to th­ese de­vel­op­ments SBP's net liq­uid forex re­serves have de­clined to US$ 9.0 bil­lion as of 19th Septem­ber, 2018 com­pared to US$ 9.8 bil­lion at the end of FY18.Broad money sup­ply saw a sea­sonal con­trac­tion of 1.2 per­cent dur­ing 1st July to 14th Septem­ber FY19 as com­pared to the con­trac­tion of 0.9 per­cent dur­ing the same pe­riod last year.

In this back­drop, the Mone­tary Pol­icy Com­mit­tee came to the con­clu­sion that along with ris­ing in­fla­tion and CA deficit, oil-price shocks, pro­tec­tion­ist trade poli­cies and fall­ing flows to the emerg­ing mar­kets pose chal­lenges to macroe­co­nomic man­age­ment in Pak­istan. The State Bank there­fore de­cided to raise the tar­get pol­icy rate by 100 bps to 8.5 per­cent in or­der to sup­port the new gov­ern­ment's con­sol­i­da­tion ef­forts and en­sure macroe­co­nomic sta­bil­ity.

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