KARACHI: The State Bank of Pakistan (SBP) on Saturday kept the policy rate unchanged at 5.75 per cent for the next two months despite acknowledging an increase in inflation witnessed over the last several months.

The interest rate has remained unchanged since the beginning of 2016-17, signalling stability in the economy.

However, the low interest rate did not encourage the private sector to avail cheap credit during the current fiscal year.

The policy rate was slashed by 0.25pc to 5.75pc in May on the grounds that inflation was expected to remain less than the target for 2015-16.

The policy rate is now at the 40-year low. It was previously slashed by 50 basis points in September 2015 to 6pc.

The SBP said that with sporadic seasonal diversions, inflation has been following a rising trend after bottoming out in October 2015. This anticipated rise is explained by stability in commodity prices against the earlier sharp decline, phasing out of second-round impact of oil prices, and some uptick in domestic demand.

The year-on-year consumer price index (CPI) increased from 1.6pc in October 2015 to 4.2pc in October 2016 while core inflation is also inching upwards.

“This manageable inflationary environment over the near-term bodes well for the current growth momentum,” said the SBP.

A healthy uptick in private-sector credit for fixed investment will further support future growth. Consequently, improving aggregate supply is expected to better cater to rising domestic demand in 2016-17. However, international oil price movements may impact inflation.

The current macroeconomic stability and net retirement of government borrowings from scheduled banks resulted in relatively easy liquidity conditions in the money market, said the SBP.

It said some support also came from an increase in bank deposits as growth in currency in circulation receded back to its past levels after exceptionally rising in 2015-16. Volatility in the interbank market continued to remain low and the overnight money market repo rate stayed close to the policy rate in the post-Sept 2016 monetary policy period.

“The global growth outlook for 2016 is mixed. While growth prospects for the US economy remain positive, uncertainties exist for international financial markets and global trade amid anticipated interest rate hike by the US Fed,” said the SBP.

Nonetheless, Pakistan’s continuous build-up of external buffers over the last three years has improved its resilience against external uncertainties. This is reflected in the current level of foreign exchange reserves, which cover more than four months of projected import payments.

In addition, the recent improvement in Pakistan’s sovereign rating along with official financial inflows is projected to sustain its foreign exchange reserves.

“However, unpredictability of non-trade flows will influence the current account in particular and the external sector in general during the rest of 2016-17,” said the SBP.

Published in Dawn, November 27th, 2016