SBP Keeps Policy Rate Unchanged At 5.75%

SBP Keeps Policy Rate Unchanged At

 

It could be termed as effective sustainable policy of the central bank and its board of directors as the policy rate was decided to remain unchanged at 5.75 percent for the sixth consecutive time during last one year.

State Bank of Pakistan (SBP), in its statement, announced to keep policy rate at 5.75 percent for the next two months showing its satisfaction over the progress of macro-economic indicators which are sustainably positive.

While experts were of the view that policy rate could be further reduced to 5.50 percent at least, but cautious approach was adopted by the central bank.

SBP statement said the inflation expectations in the current fiscal year continue to remain well anchored. This has been largely due to the near-absence of any major supply side pressures.

The real economic activity continues to gather pace at the back of better agricultural output, increase in key Large-scale Manufacturing sectors, and a healthy uptick in the credit to private sector. This expansion has helped by a range of factors including low cost of inputs, upbeat economic sentiments, improved energy supplies, and CPEC related investments. As a result, GDP growth is expected to further improve in FY17.

Also, prudent monetary policy stance has translated well into low and stable market interest rates, which incentivized private sector to borrow from commercial banks to finance their businesses and investment activities.

Accordingly, private sector credit increased to Rs 349 billion during Jul-Feb FY17 as compared to Rs 267 billion in the same period last year. Encouragingly, fixed investment category led the rise in private sector businesses loans by posting Rs 159 billion uptick during this period, compared to Rs 102 billion last year. Similarly, consumer financing continued the uptrend in the first eight months of the current fiscal year.

Improved interbank liquidity conditions also spurred the growth in private sector credit. This was led by both net government retirement to commercial banks and a decent increase in bank deposits compared to the withdrawals seen last year.

Furthermore, interbank liquidity was managed well with calibrated open market operations that kept the weighted average overnight repo rate close to the policy rate.

The expansion in economic activity has also translated into significant increase in imports, which along with lack of any sustained improvement in exports and a small decline in remittances has pushed the current account deficit to US$ 5.5 billion during Jul-Feb FY17. While net financial flows remained higher, these were not sufficient to finance the current account deficit.

However, accounting for positive impact of the recent policy measures to augment exports and check non-essential imports, the current account deficit may be contained in the coming months. Also, continuation of the financial inflows, CPEC related imports, and any major fluctuation in the global oil price will determine the overall position of the external sector in FY18.