The State Bank of Pakistan (SBP) has decided to maintain the policy rate at 13.25pc for the next two months.
In a statement issued on Friday, the SBP’s Monetary Policy Committee stated the monetary policy stance was appropriate in order to control inflation, which had remained high in the first four months (Jul-Oct) of the current fiscal year (FY20).
Inflation was recorded at 11.04pc in October 2019 compared to 11.4pc in September.
The SBP has also projected average inflation for FY20 to remain broadly unchanged at 11-12pc.
“Recent developments have had offsetting implications for the inflation outlook,” the statement said. “Inflation outturns have been on the higher side primarily because of an increase in food prices, which are expected to be temporary.”
As per the statement, the current stance of monetary policy and real interest rates were appropriate to bring inflation down to the target range of 5 – 7pc over the next 24 months.
The statement, however, did note that market sentiments have begun to gradually improve on the back of sustained improvements in the current account and continued fiscal prudence.
The statement added that in reaching this decision, the MPC considered key economic developments since the last meeting, in the real, external and fiscal sectors.
The MPC said despite the recent rise in food prices, the inflation outlook would improve. It pointed to the fact that the current account balance recorded a surplus in October 2019 after a gap of four years, and that the government’s primary balance is estimated to record a surplus in the first quarter of FY20.
It also cited recent business confidence in inflation falling soon.
“In light of the temporary nature of these [food price] increases, continued softness in domestic demand, and recent appreciation of the currency on the back of improving market sentiment, the MPC is of the view that inflationary pressures are expected to recede in the second half of the fiscal year,” the committee added.
Reviewing the real sector, the MPC said the export-oriented and import-competing sectors were strengthening, while inward-oriented sectors continue to experience a slowdown in activity.
The SBP kept its projection for GDP growth for FY20 unchanged at around 3.5pc.
On the external front, the MPC noted that the current account deficit had contracted by 73.5pc to $1.5 billion. “Most of this improvement is due to a reduction in imports, a modest growth in exports and steady workers’ remittances.”
The statement also pointed to the rupee appreciating 5.6pc since June 2019, and that since the beginning of the fiscal year, gross reserves have risen by $1.16 billion as on November 15.
The news of the policy rate is in line with market expectations, as almost all major investment banks predicted that the policy rate would remain unchanged at 13.25pc.
In a survey about policy rate expectations compiled by Intermarket Securities, 27 out of 28 research houses predicted that the SBP would maintain the status quo on the policy rate. Only one – BMA Capital – predicted the SBP would cut the policy rate by 50bps to 12.75pc.
Earlier this week, SBP Governor Reza Baqir had hinted at status quo in interest rate.
In addition, the auction of treasury bills on Wednesday saw yields remain close to the policy rate of 13.25pc, which dashed hopes for any reduction in the key policy rate.
The SBP had last changed the policy rate on July 16, to 13.25pc, a rise of 100 basis points. At the time, it cited increased potential inflation, owing to a rise in utility costs.
The central bank kept the policy rate unchanged in its review on September 16.
At the start of the year 2019, the policy rate was 10pc. Subsequent policy reviews – in January, March, May and July – increased the policy rate by a total of 325 basis points.