SBP pol­icy rate

The Pak Banker - - FRONT PAGE -

Against mar­ket ex­pec­ta­tions, the State Bank of Pak­istan has left the key in­ter­est rate un­changed at 6% for the next two months, ar­gu­ing that the re­cent ru­pee de­val­u­a­tion would man­age to off­set ex­ter­nal pres­sure on the econ­omy. The move comes as a sur­prise to mar­ket fol­low­ers and an­a­lysts who ex­pected an in­ter­est-rate hike af­ter the ru­pee un­der­went a sec­ond mas­sive round of de­val­u­a­tion last week. The de­vel­op­ment took the over­all plunge of the ru­pee to over 9% against the US dol­lar in the last three months, stok­ing fears of in­fla­tion and a cor­re­spond­ing hike in the in­ter­est rate. In the last mon­e­tary pol­icy state­ment in Jan­uary, the SBP's pol­i­cy­mak­ers raised the pol­icy rate by 25 ba­sis points to six per­cent as a pre­emp­tive mea­sure to over­come grow­ing eco­nomic chal­lenges. The cen­tral bank had main­tained the pol­icy rate at 5.75 per­cent for 20 months

The bench­mark rate de­ter­mines the cost of overnight funds in the money mar­ket. The cen­tral bank uses it as a tool to con­trol money sup­ply in the econ­omy and man­age both eco­nomic growth and in­fla­tion­ary trends. On March 20, ru­pee de­pre­ci­ated 4.43 per­cent to 115 against the US dol­lar. Bal­ance of pay­ments con­tin­ued to weaken. The coun­try's cur­rent ac­count deficit widened 50 per­cent to $10.826 bil­lion in the first eight months of the cur­rent fis­cal year of 2018. In a state­ment the SBP has said that some time should be al­lowed for the impact of re­cent pol­icy de­vel­op­ments to un­fold.

Most an­a­lysts ex­pected the cen­tral bank to in­crease the rate by 25-50 ba­sis points. Their ex­pec­ta­tion was based on the fact that in­fla­tion was building up amid ris­ing petroleum prices. But the cen­tral bank seems to have given more weight to the prospects of higher eco­nomic growth go­ing for­ward: a low in­ter­est rate is sup­posed to spur eco­nomic ac­tiv­i­ties as busi­nesses bor­row more when the cost of funds is down. The SBP state­ment noted: "The prospects of achiev­ing an eleven-year high growth rate re­mains strong with aver­age head­line in­fla­tion within com­fort­able bounds for 2017-18 and 2018-19,"

Ac­knowl­edg­ing the dan­gers that high cur­rent ac­count and fis­cal deficits pose, the SBP pointed out that the trend can af­fect medi­umterm eco­nomic sta­bil­ity. How­ever, re­cent ad­just­ments stem­ming from greater ex­change rate flex­i­bil­ity, ac­tive mon­e­tary man­age­ment as well as vis­i­ble im­prove­ments in ex­ports and re­mit­tances are ex­pected to bear fruit for the medium term in terms of sus­tain­ing the growth mo­men­tum with­out pos­ing a risk to sta­bil­ity.

It is rel­e­vant to men­tion here that the cen­tral bank let the ru­pee lose 4.4 per cent value against the dol­lar a cou­ple of weeks back. The move was aimed at mak­ing ex­ports com­pet­i­tive in the in­ter­na­tional mar­ket while curb­ing the grow­ing trend in im­ports. But the impact of the de­val­u­a­tion ap­pears on the trade bal­ance with a lag, which is why the SBP de­cided to main­tain the sta­tus quo for the time be­ing. Yet an­a­lysts be­lieve that an in­crease in the key in­ter­est rate is in­evitable. Ac­cord­ing to some ex­perts, the de­ci­sion to main­tain the sta­tus quo was on the back of sub­dued in­fla­tion. Ac­cord­ing to them, the pol­icy de­ci­sion seems to be pre­cau­tion­ary be­fore mak­ing any abrupt changes. It is es­ti­mated that there will be a hike of 1 per cent in 2018 (cal­en­dar year) on the back of a weak­ened ru­pee, widen­ing cur­rent ac­count gap, ex­pec­ta­tion of higher in­fla­tion in com­ing months and grow­ing con­sumer spend­ing.

The SBP has said fi­nanc­ing the high cur­rent ac­count deficit is a chal­lenge. A healthy growth in for­eign di­rect in­vest­ment and higher of­fi­cial in­flows were in­suf­fi­cient to com­pletely fi­nance the cur­rent ac­count deficit. The SBP has also hinted at shoring up for­eign ex­change re­serves and an­chor­ing sen­ti­ments in the forex mar­ket through ex­ter­nal in­flows.

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