Discount rate left unchanged at 13.25pc

Updated November 23, 2019

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State Bank warns inflation could rise beyond the target set for the current fiscal year. — Reuters/File
State Bank warns inflation could rise beyond the target set for the current fiscal year. — Reuters/File

KARACHI: The State Bank of Pakistan (SBP) on Friday kept the interest rate unchanged at 13.25 per cent as expected on Friday due to high inflationary pressures.

The central bank warned the inflation could rise beyond the target set for the current fiscal year.

The bank’s monetary policy statement said that annual average inflation in the ongoing fiscal year remained broadly unchanged at 11-12pc and maintaining the current monetary policy stance was appropriate.

However, it also said the recent changes in month-on-month inflation had been higher than in previous months and “if sustained could affect inflation expectations.”

“On the one hand, recent inflation outturns have been on the higher side. On the other, the causes behind these outturns have primarily been increases in food prices which are expected to be temporary,” said the SBP.

It said the decision to keep rates unchanged reflected recent developments that have had offsetting implications for the inflationary outlook.

The committee also highlighted three key developments since the last monetary policy announcement.

Projected GDP growth rate also held at 3.5pc

Firstly, the current account balance recording a surplus in October after a gap of four years -- a clear indication of receding pressures on the country’s external accounts. Secondly, the government’s primary balance is estimated to record a surplus in the first quarter of FY20, a first since Q2FY16. Thirdly, the SBP’s recent business confidence survey showed that businesses expect inflation to fall in the near term suggesting that expectations remain anchored despite the recent increases in food prices.

The SBP said the recent economic data suggests that economic activity is strengthening in export-oriented and import-competing sectors while inward-oriented sectors continue to experience a slowdown in activity.

Specifically, Large Scale Manufacturing Index (LSMI), down 5.9pc in the first quarter of FY20, showed gains in electronics, engineering goods and fertiliser sectors and decline in auto, food, and construction-allied industries of steel and cement sectors.

The latest production estimates of major kharif crops suggest the agriculture sector is likely to grow in line with projections although cotton production is likely to fall below the target.

However, despite these developments, the SBP kept its projection for GDP growth for FY20 unchanged at around 3.5pc.

In the first four months of current fiscal year, the current account deficit contracted by 73.5pc to 1.5 billion. “This improvement reflected a notable reduction in imports, a modest growth in exports and steady workers’ remittances.”

On account of favorable balance of payment developments, the rupee has appreciated by 5.6pc since its low in June.

The SBP said the fiscal consolidation gained traction year-to-date on account of broad-based taxation reforms and strict control over non-development expenditures.

The Federal Board of Revenue tax collections grew 16.2pc year-on-year in Jul-Oct period compared to 6.4pc during the same period last year. On the expenditure side, the federal releases for public sector development programme more than doubled to Rs257bn during Jul-Oct from Rs105.5bn during the same period last fiscal year.

“Private sector credit fell by Rs4.1bn during the first four months of current fiscal year compared to an expansion of Rs223.1bn during the same period last year on account of slowing economic activity,” said the SBP.

However, fixed investment loans increased, supported by the SBP’s long-term financing facility under which loans grew by Rs11.3bn during this period.

Inflation -- based on the new index -- rose 11pc YoY and 1.8pc month-on-month in October, it added. These outturns, especially month-on-month , were somewhat higher than expectations but largely reflected upward adjustments in administered prices and rise in prices of food items primarily due to temporary supply disruptions, said the SBP.

In light of the temporary nature of these increases, continued softness in domestic demand, and recent appreciation of the currency on the back of improving market sentiment, the SBP was of the view that inflationary pressures were expected to recede in the second half of the current fiscal year.

The SBP said the current stance of monetary policy and real interest rates on a forward-looking basis were appropriate to bring inflation down to the target range of 5-7pc over the next two years.

Published in Dawn, November 23rd, 2019