Interest rate kept unchanged
By Shahid Iqbal
2014-05-18
KARACHI: The State Bank has decided to maintain the interest rate at 10 per cent, meaning that no change was made during the entire second half of the current financial year. The bank stressed the need for more sustainability in positive economic indicators.
The SBP`s monetary policy for May-June announced here on Saturday threw doubts on the sustainability of positive indicators. `Recent gains in confidence in the economy, backed by improvement in key indicators, need to be nurtured to ensure their sustainability,` it said. The last change in the interest rate was made in November.
Although 1(eeping the rate unchanged could be surprising and disappointing for the business community, a sudden jump in the main inflation had created doubt over the rate cut.
`Importantly from the point of view of monetary policy it is the out1001< of inflation that matters,` the central banl< said.
`The year-on-year CPI inflation has remained volatile during FY14.
It increased sharply till November 2013 then declined for [a] few months before increasing again to 9.2pc in April 2014.
The average CPI inflation for July-April, FY14 is 8.7pc; higher than the year`s target of 8pc.
The policy statement said: `The main reason for this volatility is un-expected movements in food prices and changes in administered prices.
The SBP expects average CPIinflation to remain around 8pcduring FY15, barring any exogenous shock.
The central bank said the GDP growth during the current financial year is expected at around 4.1pc.
`Indicators of current economic activity are looking better. Provisional estimates of real GDP show a growth of 4.1pc for FY14.
This growth has been led by a 5.8pc increase in the industrial output, credit off-take by the private sector was almost two and a half times more during the first nine months of the current financial year compared to the same period of lastyear and the monthly average gross credit disbursements are about Rs150 billion higher this year.
The SBP said these trends show that interest rate is only one factor in affecting economic activity. It is the improvement in sentiments, relatively better availability of energy, and reduction in government borrowing from the banking system that has encouraged the private sector.
The continuation of these trends, however, would require a sustained effort to ease impediments to growth through implementation of necessary reforms.
It said that because of the gap between imports and exports, the trade deficit remains at an elevatedlevel of $12.2bn during July-March, FY14.
Mainly due to robust growth in workers` remittances, the external current account deficit, at $2.3bn, seems quite manageable at this point in time. This is because the capital and financial account net flows have also improved to $2.2bn, considerably easing the pressure on the balance of payments position.
`In f act, the SBP was able to meet the IMF`s adjusted Net International Reserve (NIR) target for endMarch 2014 by a wide margin.
Despite a shortfall in tax collection, the government has been able to contain the fiscal deficit at 3.1pc during July-March, FY14, said the SBP. Consequently, governmentborrowing for budgetary support from the banking system has come down to Rs276bn between July 1 and May 2, FY14 compared to Rs1,021bn during the corresponding period of last year.
In particular, government borrowing from the SBP shows a net retirement of Rs287bn as compared to an increase of Rs393bn last year.
Moreover, the government was also able to keep its borrowings from the central bank below the IMF target for end-March 2014.
`Based on a balanced assessment of these considerations, the SBP`s board of directors has decided to maintain the policy rate at 10 percent.