Monetary policy: SBP keeps key discount rate unchanged at 10%

Decision disappoints banks, analysts bemoan announcement.

KARACHI:

Against overall market expectations, the State Bank of Pakistan (SBP) announced on Saturday that the monetary policy rate will remain unchanged at 10% for the next two months.

A majority of analysts polled by The Express Tribune on Friday said that they expected the SBP to lower the monetary policy rate – which is the interest rate at which banks borrow from the central bank from the latter’s discount window – by 50 basis points.

However, the SBP decided to maintain the status quo while noting the need for a ‘pro-active policy effort’ to maintain the recent momentum in economic growth.

“Reliance on one-off inflows and foreign loans may provide short-term stability, but (the) share of private financial flows needs to increase consistently to achieve long-term stability,” the SBP said in its official monetary policy announcement.

It also emphasised the need for reducing trade deficit by improving efficiency and competitiveness of exports while lowering the share of imported oil in the energy mix.

Speaking to The Express Tribune, Standard Capital Securities Head of Research Faisal Shaji said the SBP should have decreased the policy rate keeping in view the recent surge in foreign exchange reserves, rupee’s appreciation against the dollar and contained inflation for the last three months.

“The decision shows the SBP is not bold enough to cut the interest rate. It should have acted otherwise,” Shaji said.

The SBP acknowledged in its statement that all major economic indicators have moved in the desired direction over the past few months. The SBP’s foreign exchange reserves have increased from $3.2 billion at the end of January to $4.6 billion on March 7, while year-on-year inflation came down to 7.9% in February after month-on-month deceleration in inflation in two of the last three months. The Consumer Price Index (CPI) decreased from 10.9% in November to 9.2% in December, 7.91% in January and 7.93% in February.

This means the difference between the monetary policy rate and inflation – also known as the real interest rate – stood at 207 basis points (2.07%) in February.

“This is broadly in line with the SBP’s earlier assessment that the pickup in economic activity is more likely to be a reflection of increased utilisation of idle productive capacity rather than a marginal increase in aggregate demand,” the SBP said, explaining that growth of 6.8% in the large-scale manufacturing sector during July-December is an indicator of improved aggregate supply, which bodes well for containing inflation.

Showing caution in responding to the recent improvement macroeconomic indicators, the SBP noted that a substantial and consistent accumulation of reserves is required to reach and maintain their adequate level. Admitting that a timely materialisation of anticipated foreign inflows during the fourth quarter of the current fiscal year is likely to improve the overall external position in coming months, the central bank emphasised that the expected outcome is contingent upon a host of policy actions that include an ‘appropriate’ monetary policy stance.

After increasing the rate by 100 basis points in the first half of the fiscal year, the SBP had left it unchanged at 10% in the last announcement in January as well.

Published in The Express Tribune, March 16^th, 2015.

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