KARACHI: The State Bank has kept the interest rate unchanged at 10 per cent for the next two months as it fears increase in inflation due to flood damages, a possible cut in subsidy on electricity, development cess on gas and ongoing political impasse.

The SBP issued monetary policy decision on Saturday for September-October providing a number of reasons for maintaining the status quo. The interest rate was last changed in November 2013.

“Although actual low inflation might weigh positively on market sentiments, it is the future path of inflation that matters for monetary policy decision,” said the State Bank.

Following on the actual number of 8.6pc in FY14, the average CPI inflation during Jul-Aug 2014 was recorded at 7.4pc. The SBP said this declining trend is broad based since both measures of core inflation, Non-Food Non-Energy (NFNE) and trimmed mean, also decelerated to 7.8pc and 7.14pc in August 2014 compared to 8.7pc and 7.9pc in June 2014, respectively.

“The current outlook of around 8pc average CPI inflation for FY15 might change adversely if the subsidy to electricity is cut and Gas Infrastructure Development Cess is levied,” said the SBP.

Incorporating the latest trends in exports and imports, oil payments in particular, trade deficit is going to dominate the composition of external current account deficit, even with a healthy growth in workers’ remittances, the central bank said.

The declining private capital inflows, foreign direct investments in particular, would present continued challenges in managing the balance-of-payments position, it added.

“In this regard, realisation of ex­­pected privatisation receipts and issuance of dollar-denominated Eurobond/Sukuk would be important.”

In addition to these risks, ongoing political impasse, delay in the finalisation of fourth International Monetary Fund (IMF) review, and the current heavy rains and floods, which have engulfed central and southern Punjab, threaten the nascent recovery in economic activity, said the SBP.

The former two would weigh more on the private capital inflows. The latter can potentially disrupt the output and supply chain of the perishable food items, which challenges an otherwise benign inflationary outlook.

While estimating the full extent of damages may take some time, initial opinions and past experiences suggest that the current floods would damage some kharif crops and may disrupt supply chain temporarily, it added.

The SBP said that besides having implications for economic growth, floods can also create macroeconomic imbalances by putting pressures on fiscal and external sector. Moreover, supply of loan-able funds in the credit to private sector market may also be adversely affected, at least initially.

The Bank said that large-scale manufacturing (LSM) growth might remain constrained due to continued energy shortages; reduced production capacity of independent power plants; low supply of gas to fertiliser plants; lower domestic and international prices in the sugar sector; and higher inventories and slower exports growth prospects in food and textile sectors, respectively.

Published in Dawn, September 21th, 2014