KARACHI: The State Bank of Pakistan (SBP) on Friday kept its policy rate unchanged at 6 per cent for the next two months, citing prospects for strong growth and inflation “within comfortable bounds” for the next year, the bank said in its monetary policy statement.

The SBP, however, noted that the galloping current account and fiscal deficits could affect the medium-term stability of the economy.

“Recent adjustments stemming from greater exchange rate flexibility, active monetary management as well as visible improvements in exports and remittances are expected to bear fruit for medium-term in terms of sustaining the growth momentum without posing a risk to stability,” the central bank observed in its monetary policy statement.

The rupee weakened sharply by 115.5 per dollar early this month in an apparent currency devaluation by the SBP, the second such intervention in less than four months.

The bank expects to contain the average inflation well below the 2017-18 target of 6pc, after accounting for recent exchange rate flexibility, demand pressures, and volatile global oil prices. The consumer price index during July-February averaged 4.1pc due to subdued prices and lower-than-anticipated rise in house rents.

Furthermore, growth in the real sector continues to be robust on back of the growth in agriculture, industry and large-scale manufacturing, the SBP stated.

On the monetary front, a relative improvement in financial intermediation was noted due to a sustained growth of private sector credit which is expected to maintain its momentum throughout FY18 and well into FY19.

The SBP also holds an optimistic view of the country’s exports, crediting improved demand from major trade destinations and the government’s ongoing export package. Exports rose by 12.2pc during the first eight months (July-February) of this fiscal year as against a decrease of 0.8pc in the same period last year.

“Despite the decline in new labour proceeding abroad, workers’ remittances have risen by 3.4pc in FY18 so far. However, the growth in imports remains high. Even with a deceleration during the current year due to higher regulatory duties and exchange rate movements, import growth has remained high during July-February period of 2017-18 compared to the same period last year,” the monetary policy statement noted.

While the central bank acknowledged the growth in foreign direct investment and official inflows, it noted that these are likely to be insufficient to finance the current account deficit. The full impact of recent exchange rate depreciations on exports and imports will unfold gradually in the coming months and remains to be seen, it added.

The foreign exchange reserves held by the central bank declined to $11.78 billion as of March 22.

“Going forward, along with a focus on narrowing the current account gap, government’s plans to timely mobilise external inflows, both official and commercial, will play a pivotal role in maintaining adequate level of SBP’s foreign exchange reserves and anchoring sentiments in the foreign exchange markets,” the statement said.

Published in Dawn, March 31st, 2018