State Bank maintains policy rate at 13.25 per cent

Published January 28, 2020
SBP Governor Dr Reza Baqir addresses a press conference in Karachi on Tuesday. — DawnNewsTV
SBP Governor Dr Reza Baqir addresses a press conference in Karachi on Tuesday. — DawnNewsTV

The State Bank of Pakistan (SBP) held its main policy rate at 13.25 per cent on Tuesday as it juggled competing goals of adding stimulus to the economy and taming inflation.

The central bank has held rates at 13.25pc since July, when it took a pause from a series of hikes at a level some businesses and exporters have said is hampering investment.

“While controlling inflation we also have to support sectors that contribute to our exports,” SBP Governor Dr Reza Baqir said at the bank's first monetary policy announcement of 2020.

Inflation rose 12.6pc in the year to December, just below an almost nine-year high of 12.7pc hit a month earlier, as rising costs for items like food put pressure on household budgets and rising oil and power prices lifted costs for businesses.

Baqir explained that the interest rate has not been changed as the inflation rate is expected to remain at 11 to 12pc this year, Radio Pakistan reported. However, he said, improvements in supply are likely to reduce inflation.

“Inflation will start declining gradually, but when we're not sure, we can't say,” Baqir said.

He said economic stability in the country is further improving with job creation expected to rise. According to the SBP governor, agricultural production may not meet its target this year.

The bank also announced measures to support exporters, such as increasing credit limits, underscoring the toll historically high rates are having on businesses for whom the prospect of higher borrowing costs could lead to holding off on investment.

Defending the elevated interest rate, Baqir said it is lower than the Pakistani historical average of 3pc real interest rate. He added that Pakistan's real interest rate is also comparable to those of other countries.

Vulnerabilites improving

The SBP noted that key economic vulnerabilities that had sparked alarm for the government and economists the previous year were improving.

With sinking foreign reserves and a large current account deficit, the government struck an agreement in April with the International Monetary Fund for a three-year rescue package worth $6 billion.

The current account deficit had contracted by 75pc to $2.15 billion in the six months ending December, according to the bank's monetary policy statement. Foreign reserves had risen more than 60pc to $11.7 billion in the past six months.

Baqir said that a surge in portfolio inflows reflected an improvement in international investors' credit assessment of Pakistan, and was deepening capital markets while representing limited risks.

But some economists have raised concerns about this so-called 'hot money' as high interest rates draw foreign investment into short-term debt which could pose a risk if it is suddenly withdrawn.

“The State Bank is attracting ... hot money, they want hot money to keep coming for some time so the external account improves,” said Khurram Shehzad, an economist and financial analyst based in Karachi.

He added that in the medium term, the government still needed either to ramp up fiscal spending or lower interest rates to spur economic activity.

“Stabilisation has taken place ... but post-stabilisation we now need growth,” he said.

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