Central bank keeps interest rate unchanged at 10%

State Bank says rate has been impacting the economy but inflows increased and borrowing lessened.

KARACHI: Citing higher inflows, single digit inflation and reduced borrowing by the state, the State Bank of Pakistan on Saturday announced that it was keeping the monetary interest rate unchanged at 10 per cent, in line with industry expectation.

According to a statement from the central bank noted that despite a shortfall in tax collection compared to the budgeted target, the government had been able to contain the fiscal deficit at 3.1 per cent during July-March, FY14.

Government borrowing, the bank said, had come down to Rs276 billion during July 1 – May 2, FY14 compared to Rs1.21 trillion during the corresponding period of last year. “In particular, government borrowing from SBP shows a net retirement of Rs287 billion as compared to an increase of Rs393 billion last year.”

The measure had enabled the government to keep its borrowings from SBP below the IMF target for end-March 2014.

However, the bank said that there was volatility in CPI. It increased sharply till November 2013 then declined for few months before increasing again to 9.2 per cent in April 2014. The average CPI inflation for July-April, FY14 is 8.7 per cent; higher than the year’s target of 8 per cent.

“The SBP expects average CPI inflation to remain around 8 per cent during FY15, barring any exogenous shock.”

Noting that the interest rate was one of the factor affecting economic trends, the bank said its examination of private credit data also points in the direction of improved economic activity. For instance, the flow of net credit to private sector was almost two and a half times more during the first nine months of current fiscal year compared to the corresponding period of last year. Similarly, the monthly average gross credit disbursements, arguably a better gauge of the nexus between credit and production, during the same period are about Rs150 billion higher this year.

However, it warned that the gap between imports and exports remains high and it would need close monitoring going forward. The trade deficit remains at an elevated level of $12.2 billion during July-March, FY14. Also, the Real Effective Exchange Rate (REER) had appreciated by 8 per cent in Q3-FY14 and its potential impact on the trade balance needs to be monitored carefully.

It noted that due to robust growth in worker’s remittances, the external current account deficit, at $2.3 billion, seemed manageable. The inflows have been supplemented by capital and financial account net flows which have also been improved to $2.2 billion, considerably easing the pressure on the balance of payments position.

In fact, the SBP claimed it was able to meet the IMF’s adjusted Net International Reserve (NIR) target for end-March 2014 by a wide margin.