THE SBP move to leave its key policy rate unchanged at 6pc for February-March 2016 was generally expected because the case for keeping the rate intact was seen as much prudent as the option to make a slight downward adjustment.

That is perhaps why, business associations have, by and large, raised no objection even though some of them had called for a cut.

Banks, on the other hand, are happy because a cut in interest rate would reduce their huge profits at a time when they have begun to lend more to the private sector.

Low profit rates on the National Savings Schemes in the past had made it possible for banks to attract more savings. Now, in the current interest rate environment they will also be able to mobilise fresh deposits at affordable rates, senior bankers say.

The central bank has maintained its policy rate at 6pc since September last year. Low inflation and depreciating value of the rupee prevented a further cut.

But in previous policy rate reviews, it was noted that the credit for private sector was not picking up.

“A rate cut would have become inevitable if private sector lending wouldn’t have shown a strong pick-up,” says a source privy to the re-constituted Monetary Policy Committee (MPC). But the rising bank lending to the private sector prompted the central bank to keep its policy rate unchanged once again.

‘With the induction of three independent members the newly formed Monetary Policy Committee will make a difference in its future decisions when the case for and against a certain policy perspective differs widely’

Bankers and SBP officials say the newly formed MPC has made little difference in interest rate setting during the current exercise. But they believe that the induction of three independent members will make a difference in the committee’s future decisions when the case for and against a certain policy perspective differs widely. This time, the case for holding interest rate or allowing a modest cut was almost equally strong given the recent economic developments, they say.

The average CPI inflation in July-Jan FY16 at 2.26pc is not expected to shoot up soon even amidst a high GDP growth projection, primarily due to 30-year low international oil prices and only moderately growing consumer demand in the economy. And, the net private sector borrowings from banks between July 1, 2015 and January 15, 2016 have risen by 79pc to Rs288bn, from Rs161bn to Rs288bn in the year-ago period.

The SBP expects further increase in the private sector credit flows on the back of a 4.4pc growth in large scale manufacturing in five months of this fiscal year. A recent rise in consumer loans and expected increase in economic activity CPEC-related energy and infrastructural projects are also likely to boost private sector credit demand.

A declining balance of payments deficit amid hopes for increase in CPEC-triggered foreign investment inflows should help keep exchange rates stable for some time. Central bankers say stable interest rates since mid-September coupled with a strong SBP check on forex markets have kept the rupee from falling rapidly.

Between October 2015 and January 2016, the rupee has lost only 0.4pc of its value against the dollar, coming down to 104.92 at end-January from 104.51 at end-September.

By keeping interest rate unchanged, the SBP has also signalled that containing expansion in currency in circulation has now become a real priority. Between July 1, 2015 and January 15, 2016 currency in circulation has increased by Rs441bn against Rs242.6bn in the year-ago period.

Businessmen believe that private sector credit demand will remain high despite no interest rate cut as they don’t see a notable rise in banks’ lending rates. Chairman of a textile outfit says that top companies in the textiles and other sectors get loans in some cases, at 9-10pc.

Fresh weighted average lending rate, excluding inter-bank and zero-rated lending, of all banks stood at 9.25pc in December 2015. The government’s borrowings from banks were down to Rs659bn in six and a half months of this fiscal year from Rs697bn a year ago, businessmen say.

“But this does not mean that lending rates of banks for high-risk, low-intake segments of borrowers, already in the range of 18-24pc, would remain immune from a hike (just because of the factors cited above)”, says president of one of the top five commercial banks.

Published in Dawn, Business & Finance weekly, February 8th, 2016