In line with expectations: SBP keeps monetary policy rate unchanged

Will remain at 10% for 2 months, statement mainly recounts positive developments.

KARACHI:

In line with market expectations, the State Bank of Pakistan (SBP) on Saturday kept the monetary policy rate unchanged at 10% for the next two months.

The monetary policy rate is the interest rate at which commercial banks are allowed to borrow from the central bank’s discount window.

Most economists believed the status quo would prevail in the monetary policy announcement after year-on-year inflation for April clocked up at 9.2%. Only one out of the six brokerage houses polled by The Express Tribune on May 6 said it expected the central bank to cut the discount rate.

Issued bimonthly, the monetary policy rate helps the central bank keep inflation in check by allowing it to change the level of money supply in the economy.

Earlier on, an improvement in nearly all key economic indicators, ranging from the provisional gross domestic product (GDP) growth rate to foreign exchange reserves, fiscal deficit, rupee-dollar parity and the flow of credit to the private sector, suggested that the central bank would slash the discount rate to spur growth.

“Recent gains in confidence in the economy, backed by improvement in key indicators, need to be nurtured to ensure their sustainability,” the SBP said in its policy announcement.

Speaking to The Express Tribune, Topline Securities CEO Mohammed Sohail said that the decision to maintain the status quo is ‘depressing’ because the SBP’s own review of the economic situation – along with its estimate of 8% inflation in 2014-15 – called for a cut in the discount rate.

Indeed, eight out of the nine paragraphs of the monetary policy statement recount the largely positive economic developments in recent months, such as substantially reduced government borrowing for budgetary support from the SBP as well as the banking system.

“Foreign exchange reserves are at a 14-month high while the rupee gained 7% strength in March alone. Instead of 11%-12% inflation that the SBP had expected initially, the consumer price index (CPI) is likely to be around 8.7% for the current fiscal year,” Sohail said.

Referring to the spread of 330 basis points between the average inflation figure and actively traded two-year government paper, Sohail added that the real interest rate – or the difference between prevailing inflation and interest rates – has already reached a ‘record high’.

Commenting on the SBP’s monetary policy decision, AKD Securities CEO Farid Alam said it is solely based on the higher-than-expected inflation figure for April. “Retailers will increase prices as soon as the rupee weakens against the dollar; however any appreciation of the rupee’s value against the dollar is seldom reflected in market prices,” informed Alam.

“Big conglomerates may have gained from the rupee’s newfound strength, but ordinary people have yet to receive any significant benefit. The relatively high CPI reading for the last month reflects the administrative problem in combating high inflation in Pakistan,” Alam said, adding that he expected a drop of 50-100 basis points in the discount rate before the release of the latest inflation number.

According to the SBP statement, its estimate of 8% inflation in 2014-15 is based on moderate aggregate demand, stable outlook of international commodity prices and deceleration in broad money growth led by contained government budgetary borrowings from the banking system.

Referring to the GDP growth of 4.1% in 2013-14, improvement in sentiments, relatively better availability of energy and reduction in government borrowing from the banking system, the SBP statement said these trends show that the interest rate is but one factor that affects economic activity.

“The continuation of these trends, however, will require a sustained effort to ease impediments to growth through the implementation of necessary reforms,” it said.

Published in The Express Tribune, May 18^th, 2014.

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