SBP keeps benchmark interest rate unchanged at 5.75 per cent

The SBP may move the interest rates upwards during the third quarter of fiscal year 2016-17, says analyst

KARACHI: In line with expectations, the State Bank of Pakistan (SBP) on Saturday maintained the benchmark interest rate unchanged at 5.75 per cent for the next two months.

The SBP announces a target rate every two months, which serves as the benchmark interest rate for overnight funds in the interbank market. It is one of the tools the central bank uses to ensure price stability in the economy.

Decreasing the target rate poses a risk of high inflation, but also stimulates economic growth by making credit cheaper. In contrast, raising the target rate restricts the level of liquidity, which subdues consumer prices in the economy.



“The current policy rate of 5.75 per cent and discount rate of 6.25 per cent are likely to remain intact till second quarter of fiscal year 2016-17. However, the SBP may move the interest rates upwards during the third quarter of fiscal year 2016-17,” Summit Capital Research analyst Chander Kumar predicted in a research report issued on Friday.

The central bank tries to strike a balance by targeting the overnight cost of funds at a level that promotes maximum economic growth without causing high inflation.

The year-on-year consumer price index (CPI) inflation rose to 3.6 per cent in August 2016 from 1.8 per cent in August 2015, while the average inflation during the first two months of the current fiscal year was more than double the same period last year.



Similarly, the core inflation (measured as both non-food non-energy and 20 per cent trimmed mean) during this period was also higher than the last year, the statement said.

The expected pick up in domestic demand is largely going to determine the inflation path in the remaining months of FY17. This is also reflected in the IBA-SBP Consumer Confidence Survey of September 2016 which shows improvements in current and expected economic conditions and a major rise in consumer confidence.

However, uncertain global oil price continues to remain a major determining risk.