SBP leaves interest rate unchanged at 5.75pc

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KARACHI: The State Bank of Pakistan (SBP) decided on Saturday to hold the benchmark interest rate at 5.75 per cent for the next two months, fearing average inflation would rise to 5.5pc in the current fiscal year.
SBP Governor Ashraf Mahmood Wathra, who heads the nine-member Monetary Policy Committee (MPC) that decides the rate, warned that unexpected increase in oil prices may result in wider trade deficit, lower gross domestic product (GDP) growth and a fall in workers’ remittances.
The SBP said in a statement that falling commodity prices and any setback to security situation could hurt the chances of attaining the GDP growth target of 5.5pc this fiscal year.
The central bank forecast that the average Consumer Price Index inflation — which dropped to a 47-year low of 2.9pc in the preceding fiscal year — would remain in the range of 4.5pc to 5.5pc during 2016-17.
“Any upward adjustments in gas tariff, fiscal slippages and supply disruptions pose risk to this assessment,” the SBP said, adding that the uncertain global oil price was the major risk to this projection.
In addition to sluggish global demand, a possible dampening impact of Brexit — the British vote to leave the European Union (EU) — on global commodity prices and difficulties in clearing excess domestic food stock also poses risk to this inflation forecast, the bank said.
Mr Wathra said Pakistan’s economy posted notable improvements in the fiscal year 2015-16 as foreign exchange reserves held by the SBP were $18.1bn by the end of June. In addition, the budget deficit declined and revenue collection exceeded expectations.
The SBP cut its policy rate by a cumulative 75 basis points in 2015-16 and 300bps in 2014-15. Moreover, the six-month Karachi Interbank Offered Rate (Kibor) saw a steeper 93bps reduction in 2015-16.
As a result of lower interest rates, credit off-take by the private sector more than doubled to Rs461 billion from Rs224bn a year ago.
On the external front, despite a decline in exports growth, the foreign exchange market remained broadly stable due to lower oil prices, healthy workers’ remittances and adequate official capital inflows, the SBP said.
Even with a slight increase in the current account deficit on account of expected higher non-oil imports, positive growth in workers’ remittances were likely to keep it at manageable levels, it said.
“Unexpected increase in oil prices may result in wider trade deficit. Further deterioration in global trade due to slowdown in China may accentuate this problem. Slowdown in the Gulf region may decelerate growth in workers’ remittances,” the SBP added. Furthermore, uncertainties about recovery in the EU after Brexit could have repercussions for financial inflows and trade to the country, the SBP governor said.
Pakistan’s economic growth was set to increase during this fiscal year, Mr Wathra said, adding that the impetus was likely to come from the continuation of same positive factors, including rising investment under the Public Sector Development Programme (PSDP) and China-Pakistan Economic Corridor (CPEC); improved energy availability to industry; lagged impact of prudent monetary policy; healthy private sector credit uptake and better law and order.
In the absence of risks as mentioned earlier and building on to the current momentum, GDP growth could also experience a spurt in 2016-17.
The SBP indentified two intertwined factors as central in shaping up this possible scenario. First, investments and activities related to PSDP and CPEC were going to gain full traction which would be crucial in giving further boost to construction and allied industries, large-scale manufacturing, electricity generation and its impact on the service sector, and promoting an investment climate in the country.
Second, a successful end to the International Monetary Fund programme would bring the much-needed confidence boost to Pakistan economy and the government which could further enhance the growth prospects in the current fiscal year.
The SBP cut the interest rate by 25bps in the last monetary policy announced in May.