State Bank of Pakistan (SBP) has raised policy rate by 25 basis points to 6 percent for the period of next two months.
This is the first increase after twenty months or ten policy announcements, which kept the rate stable at 5.75%.
The monetary policy committee of the SBP made this announcement on the basis of higher current account deficit and trade deficit which impacts negatively on correlated factors of economy including the health of the Rupee against Dollar and rising inflation rate in the country.
MPC is of the view that this is the right time to make a policy decision that would balance growth and stability in the medium to long term.
Four key factors of Pakistan’s economy have witnessed important changes since November 2017 impinging upon the policy rate decision. Firstly, Rupee has depreciated by around 5 percent. Secondly, oil prices are hovering near USD 70 per barrel.
Thirdly, a number of central banks globally started to adjust their policy rates upwards adversely affecting PKR interest-rate differentials vis-à- vis their currencies. Fourthly, multiple indicators show that the output gap has significantly narrowed indicating a buildup of demand pressures.
Pakistan’s economic growth is on track to achieve its highest level in the last eleven years. Average headline inflation remains within the forecast range of SBP, but core inflation has continued to increase. Fiscal deficit for H1-FY18 is expected to fall close to the last year’s 2.5 percent.
There has been visible improvement in export growth and remittances are marginally higher. However, largely due to high level of imports the current account deficit remains under pressure. The exchange rate adjustment in December 2017 is expected to help ease the pressure on the external front.
The revised rate will mildly affect the dynamics of the banking industry and the corporate and business world having availed a long period of low interest rates for loans to invest and expand their operations in the targeted market.
Though, the increase in policy rates will not affect adversely their optimistic business and investment plan going forward but will support the economic stability as per present requirement.
The Rupee depreciation in December 2017, the export package, the lagged impact of adjustments in regulatory duties, favorable external environment, and expected increase in workers’ remittances, will contribute to a gradual reduction in the country’s current account deficit.
While increase in international oil prices pose a major risk to this assessment, managing overall balance of payments in near term depends on the realization of official financial flows.