SBP Leaves Interest Rate Unchanged at 5.75%

Tariq Bajwa, the new Governor State Bank of Pakistan (SBP), today announced his first monetary policy statement to keep the policy rate unchanged at 5.75 percent for next two months.

This is the eighth time the policy rate has been kept at 5.75 percent, which has made the stability of soft monetary policy for a year and four months.

The decision of monetary policy committee was based on the strong likelihood of continued growth momentum, contained inflation and the challenges on the external front.

The statement reads that the three features of Pakistan’s economy stand out at the start of FY18.

First, average headline inflation though higher than FY17 is expected to be lower than earlier outlook and will stay below the target of 6.0 percent, mainly on the back of favorable supply conditions. Second, domestic demand is set to gain further traction as evidenced in the current growth in the real sector, credit to private sector and imports.

Third, on the external front, the underperformance of both exports and workers’ remittances greatly impinged upon the current account deficit which reached USD 12.1 billion in FY17.

This is mainly owing to machinery imports both for CPEC and non-CPEC energy and infrastructure projects, whereas, imports for plant up-gradation under the ongoing export package for the textiles sector also added pressures.

For the time being, the overall balance of payments is expected to stay at a manageable level in FY18- an assessment relying on steady anticipated financial account inflows and improvement in world growth.

These trends are set to continue in FY18 given the developments on the real side.

Going forward, the global forecasts project a positive outlook with both growth and international trade picking up in FY18. Based on this assessment coupled with positive domestic policy measures, Pakistan’s exports are expected to post gains.

Imports on the other hand, albeit at a slower pace, are also expected to grow in line with continuation of CPEC related activities and improving economic growth. While it remains uncertain whether remittances can return to posting meaningful positive growth very soon, stability of the external account and instrumental reserve accumulation depends upon timely inflow of budgeted bilateral and financial inflows in FY18 as well.