Double-digit inflation: SBP keeps policy rate unchanged at 12%

Says key challenge is to finance fiscal and current account deficits.

KARACHI:

In the face of a persistent double-digit inflation, the State Bank of Pakistan (SBP) has decided to leave interest rate unchanged at 12 per cent and said the basic challenge faced by the economy is to finance its fiscal and current account deficits.

“The central board of directors of the State Bank has decided to keep interest rate unchanged,” SBP Governor Yaseen Anwar said while announcing the monetary policy for February and March at a press conference at the SBP head office here on Saturday.

“Inflation rate is still in double digits, the central bank could further cut the interest rate, if the inflation was in single digit,” an SBP official said in reply to a question at the press conference.

While supporting the previous two decisions of the central bank in which it reduced the interest rate, better known as the discount rate or the policy rate, by 200 basis points, the SBP officials said these moves helped control a continuous rise in non-performing loans and increased credit flow to the private sector.

In the monetary policy statement, the central bank stressed that the basic challenge faced by the economy was financing the fiscal and current account deficits.

The lack of diversified and sustainable financing sources had resulted in substantial borrowings from the banking system by the government and declining foreign exchange reserves. This squeezed the availability of credit for the private sector and increased pressure on the rupee, it said.

Moreover, inflationary pressures have not eased significantly. It must be emphasised that a sustainable economic recovery over the medium term would call for a sizeable increase in both the domestic and foreign private investment in the economy, it added.

“For this to happen, the business confidence needs to be revived by reducing uncertainties due to energy shortages,” it said. “Against this backdrop, the SBP considers the 200-basis-point reduction in the policy rate already in FY12, to be appropriate, and has decided to keep the rate unchanged at 12 per cent.”

Speaking on the International Monetary Fund’s (IMF) concerns that Pakistan’s fiscal deficit could rise up to 7 per cent, the SBP governor said his team did take into consideration the IMF’s and other analysis before taking the decision on the interest rate.

“Five months are left this year and few things are still unclear. I am optimistic and think there is no need to engage in speculations,” Anwar said.

When asked why the SBP was banking heavily on the auction of 3G licences, he replied, “The 3G licences have generated much interest not only at home but also abroad. Though the estimated proceeds from the licences are over $800 million, but they can exceed $1 billion.”

On the positive side, the SBP governor said a declining interest rate environment together with a relatively better growth in large-scale manufacturing (LSM) was expected to help pick up private sector credit.

The LSM sector grew by 1.5 per cent during July-November of financial year 2011-12, which is in contrast to an average contraction of 3.1 per cent during the same period in the last three years.

Published in The Express Tribune, February 12^th, 2012.