SBP policy rate

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.