Interest rate kept unchangedArchive
KARACHI: The State Bank of Pakistan has kept the policy rate unchanged at 6.5 per cent, expecting higher monetary expansion during the current financial year.
Announcing the bi-monthly monetary policy on Saturday, SBP Governor Ashraf Mahmood Wathra said some recent developments like the impact of monetary easing in FY15, expected higher monetary expansion in FY16, bottoming out of inflationary expectations, and the base effect of historically low inflation during the second half of FY15 might suggest slight deviation in the disinflationary trend of FY15 going into FY16.
He said the newly introduced target rate would remain at 6.5pc and the ceiling rate would be 7pc. In May the bank had introduced double rates that may help it to change either one or both rates to get the required results of the monetary management.
“However, there is no major change in SBP’s previous inflation forecast,” the governor said.
“There is a possibility of upward revision in energy tariffs in FY16 and an adverse impact of floods on production of perishable food items going forward that could have an upward pressure on inflation,” he said.
Meanwhile, projections of high oil production and weak global demand suggest that international oil price might not have bottomed out yet.
“Given the recent behaviour of Pakistani CPI inflation amid falling international oil prices, this could result in keeping inflation on the lower side.”
Mr Wathra said the improvements in macroeconomic indicators led the SBP to continue with its accommodative monetary policy stance and slashed the policy rate by a cumulative 300 bps in FY15.
“The key factors facilitating the decisions can be pinned down to a sharp decline in CPI inflation, along with its benign outlook, and improvement in external account.”
He said that following its declining trend in nearly every month of FY15, average CPI inflation came down from 8.6pc in July FY15 to 4.5pc in June FY15.
The expected higher consumption in low interest rate environment, planned increase in development spending, and budgetary incentives for construction sector could provide some thrust to growth. “Implementation of infrastructure projects planned under the China-Pakistan Economic Corridor and addressing structural issues especially related to energy and security would create favourable investment environment which is necessary to sustain economic growth over the medium to long term, he said.
The governor said the net SBP foreign exchange reserves rose from $10.5 billion at end-December 2014 to $13.5bn as of June 30, 2015.
“Despite these positive developments, due to structural bottlenecks, sluggish global demand, and lower commodity prices, exports contracted by 3.7pc in FY15.”
He said the net foreign direct investment declined to 0.3pc of GDP in FY15. More work therefore needed to be done in the coming years to attract investments.
The net SBP reserves are projected to increase slightly above 4 months of imports by end-June 2016. “The need to revive private inflows and exports to sustain this trajectory in foreign exchange reserves remains there,” he said.
The revised FY15 budget estimates show fiscal deficit of 5pc, lower than the previous year. The estimated reduction in fiscal deficit in FY15 is primarily due to improvement in tax revenues. Total expenditures, on the other hand, are estimated to remain higher than the budget estimates despite reduction in subsidies and lower interest payments.
The SBP governor said achieving the FY16 fiscal deficit target of 4.3pc depended on collection of estimated Rs145bn from Gas Infrastructure Development Cess and FBR revenue target of Rs3,104bn.
The major drag for private sector credit off-take remained in the structural bottlenecks and low commodity prices. Private sector borrowing in FY-15 was Rs208bn compared to Rs371bn in FY-14.
“In FY16, construction and real estate sectors show promise as indicated by their continued credit uptake. The lagged impact of easy monetary policy of FY15 is also expected to positively affect the credit growth in the upcoming credit cycle in the first half of FY16, Mr Wathra said.
Published in Dawn, July 26th, 2015
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