SBP policy rate remains unchanged at 10pc

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LAHORE: State Bank of Pakistan (SBP) has kept the policy rate unchanged at 10.0 percent for next two months.
Governor SBP, Ashraf Mahmood Wathra announced the Monetary Policy Statement (MPS) for the next two months at a press conference on Saturday. Central Board of Directors of SBP chaired by the Governor SBP took this decision after detailed meeting.
In recent months the rupee has remained stable as Pakistan has rebuilt its foreign exchange reserves following the successful sale of a $2 billion Eurobond, an auction of 3G and 4G phone licences, and an injection of cash from bilateral and multilateral lenders.
Wathra said that the economic conditions are certainly better at the beginning of FY14-15 than a year ago but a detailed assessment of the economy indicates challenges and vulnerabilities as well.
The Governor stated that SBP is effectively managing market sentiments by supplementing the monetary policy stance with calibrated liquidity operations in the interbank market, adding that “this has contributed in achieving stability in the foreign exchange market and in building foreign exchange reserves”. This has also facilitated the shift in banks’ investment from T-bills to PIBs, improving domestic debt maturity profile of the government.
He said that a significant reduction in government borrowings from the banking system is contributing towards low inflationary expectations and has provided necessary space to the private sector to borrow from the banking system. However, persistent energy shortages and deteriorating security conditions hint towards some risks to credit demand.
Wathra told that the growth in domestic debt during FY14 had decelerated to 14.5 percent, which was significantly lower than the average growth of around 27 percent during the last three years. Governor SBP reminded the audience that the increase in external borrowings since February 2014 had provided a much needed respite and short term stability to the balance of payments position. These foreign inflows resulted in a capital and financial account surplus of $6.1 billion which comfortably financed the current account deficit of $2.6 billion and led to a significant increase in SBP’s foreign exchange reserves. By 4th July, SBP’s foreign exchange reserves have increased to $9.6 billion.
He said that the increase in SBP’s foreign exchange reserves brought about a shift in sentiments in the foreign exchange market and stabilized the exchange rate. “Moody’s Investors Service has revised the outlook on Pakistan’s foreign currency government bond rating to stable from negative”.
He said that the impetus of positive sentiments together with continuation of IMF program and government’s privatization plan is expected to result in further strengthening of the external position in FY15. However, sustaining this trend in the medium term, especially in the post IMF program years, would require additional efforts and reforms.
The Governor said that despite challenging security conditions and energy shortages, the real GDP grew by 4.1 percent in FY14. However, investment expenditures as a percent of GDP have declined, which indicates erosion in economy’s future productive capacity, he added.
Wathra told that the average CPI inflation in FY14, 8.6 percent, was in single digits for the second consecutive year. For FY15, the SBP expects average CPI inflation to remain in the range of 7.5 percent to 8.5 percent. “However, international oil price uncertainty and unanticipated price shocks pose risks to the inflation outlook”, he concluded.