Monetary Policy: SBP keeps interest rate unchanged at 6%

Rising inflation reason for maintaining rate, reflects pickup in aggregate demand


Our Correspondent April 09, 2016
Rising inflation reason for maintaining rate, reflects pickup in aggregate demand. PHOTO: ATHAR KHAN/EXPRESS

KARACHI:


In line with analysts’ expectation, the Monetary Policy Committee of the State Bank of Pakistan (SBP) has decided to keep the policy rate unchanged at 6% for the next two months.


One of the major reasons for the central bank to maintain the benchmark interest rate is a rising trend in inflation. The trend is reflective of a pickup in aggregate demand in the wake of an improved security situation and real incomes, it said.

The policy rate is the interest rate that the SBP tries to maintain in the interbank market to control money supply in the economy and achieve price stability and economic growth targets. It reduced the policy rate from 6.5% to 6% last September after bringing it down by 300 basis points in 2014-15. The central bank has maintained it at 6% in the subsequent monetary policy announcements in November, January and April.

After bottoming out in September 2015, the year-on-year Consumer Price Index (CPI) is on a rising trend. Similarly, both core and non-core inflation indicators have shown an upward trend in recent months. “Nevertheless, this rise in inflation was anticipated and the benign inflation outlook for the remaining months of 2015-16 remains largely unchanged,” the SBP said in the statement.

The increase in aggregate demand, the SBP said, is reflected in the acceleration in construction activities, rising demand for consumer and expansion in the services sector.

Credit to the private sector is on the rise, the SBP pointed out, owing to the lower cost of borrowing, as the benchmark interest rate is hovering at record low levels. In particular, fixed investments have increased for the fifth quarter. “With positive consumer sentiments and incremental lending rates at considerably lower levels, the uptake in credit to the private sector is expected to end 2015-16 on a higher level than that of 2014-15,” the SBP said.

The central bank highlighted improved business sentiments, lower input prices and better energy availability as the main reasons for the improvement in supply conditions. The excess stock of major food items and the pass-on of lower oil prices to domestic consumers in February are expected to keep downward pressure on inflation, it said.

The SBP also highlighted the recent stability in the rupee-dollar parity, contained budget deficit, increased tax collection and surplus in balance of payments as major positive developments.

Towards the end of its statement, however, the SBP showed concerns about the decline in exports by calling it “worrisome”.

“General weakness in global trade further accentuates this risk. Hence, the current improved domestic environment provides for the necessary conditions to inculcate better value addition and diversify products and markets for sustainable growth of exports,” the SBP said while explaining its decision against further lowering the benchmark interest rate.

Speaking to The Express Tribune, Karachi Chamber of Commerce and Industry (KCCI) President Younus Muhammad Bashir said the SBP should have brought the benchmark interest rate down by 1% to 5%.

“Exports are declining and the SBP should stop the trend by making credit cheaper for the industrialists,” he said.

Published in The Express Tribune, April 10th, 2016.

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