ISLAMABAD: The State Bank of Pakistan (SBP) Saturday announced monetary policy for next two months, by reducing the ceiling of interest rate corridor by 100 basis points from 8 to 7 per cent.
SBP Governor Ashraf Mehmood Wathra made this announcement here at a press conference while the cenrtal bank’s board of directors meeting was in progress. SBP Deputy Governor Riaz Riazuddin and senior officials were present on the occasion.
Ashraf Wathra said the new “SBP target rate” had been set at 50 basis points below the ceiling rate. The central bank, he said, would ensure that the overnight rate remained close to this target rate, which would now be called as Policy Rate.
Width of the interest rate corridor, he added, had been reduced by 50 basis points from 250 to 200 basis points.
He said this was the lowest interest rate announced by the SBP in last 42 years.
“Consequently, the floor rate is set at 5 per cent,” he remarked.
The SBP Governor said this measure would promote Large Scale Manufacturing (LSM) sector and further boost the economic growth.
Later, an SBP statement about the decisions of board of the directors said the macroeconomic conditions towards the end of financial year (14-15) had further improved compared to its beginning.
The current account deficit, it said, had narrowed down; average annual inflation was significantly below the target; there was a marginal uptick in real GDP growth; and foreign exchange reserve build up continued.
The statement said that all these developments were reflected in the recent upgrades in outlook by international rating agencies that had further improved investor confidence.
It added that the current macroeconomic stability achieved through domestic policies and favourable external developments provide an opportunity to focus on reforms that would put the economy on sustainable growth path.
With contraction in imports, led by sharp decline in oil prices, and strong growth in remittances, the external current account deficit at $1.4 billion during Jul-Apr FY15 was around half of the deficit recorded in the corresponding period of last year, the statement said.
It further said that the improvement had overshadowed lower surplus in capital and financial account, especially weak foreign private investment.
Overall, this has supported the reserve building efforts with net SBP reserves rising from $9.1 billion as of June 30, 2014 to $12.5 billion as of May 15, 2015, it added.
“They are expected to increase further due to subdued outlook of international oil prices, successful continuation of IMF program, and realization of expected official foreign inflows. Increase in foreign private inflows can further strengthen this outlook and sustain stability in the foreign exchange market.”
The SBP statement further said that inflation continued with its downward trajectory in this fiscal year.
It observed that the year-on-year CPI inflation had declined to 2.1 per cent in April 2015 from 8.2 per cent in June 2014.
The decline in inflation during the current fiscal year had been broad based as the entire headline and underlying measures of inflation had recorded deceleration, it added.
The statement said soft international commodity prices, stability in exchange rate, contained government borrowings from SBP, moderate aggregate demand, and SBP’s earlier conservative monetary policy stance had remained the key factors in controlling inflation this year.
Going forward, the SBP said continuation of inflation at lower levels was reflected in the latest IBA-SBP survey of May 2015 that reported subdued inflation expectations.
However, uncertainty about international oil prices and possible adjustment in domestic energy prices were the main risks to this inflation outlook, the statement said.
It added that credit growth during Jul-Mar FY15 had remained well diversified in terms of coverage and type of finance.
All three sectors of the economy – agriculture, manufacturing and services -availed credit both for working capital and for fixed investment purposes.
The highlight remained the loans to private sector businesses in fixed investment category that increased to Rs84.4 billion in Jul-Mar FY15 from Rs 50.3 billion in the same period of last year, the SBP said.
However, owing largely to decrease in commodity prices, the statement added, loans in the working capital category dropped to Rs 90.3 billion in Jul-Mar FY15 from Rs 223.8 billion in the same period of FY14. Improving investor confidence, buoyant construction activity, continuous stability of the banking system, and the recent monetary easing were expected to positively impact credit uptake in the coming months, it added.
