In line with market expectations, the State Bank of Pakistan (SBP) decided on Saturday to keep the monetary policy rate unchanged at 10%.
Addressing a press conference at the central bank’s head office, SBP Governor Ashraf Mahmood Wathra painted a rosy picture of the economy by saying that conditions at the beginning of 2014-15 are ‘certainly better’ than a year ago.
The monetary policy rate, which is announced every two months, is the interest rate at which commercial banks are allowed to borrow from the central bank’s discount window. The central bank uses this tool to control inflation by changing the level of money supply in the economy.
The SBP has its reasons to be optimistic about the economy. Stability is finally returning to the foreign exchange market, with the SBP-held foreign exchange reserves amounting to $9.4 billion on July 11.
Similarly, the average Consumer Price Index (CPI) inflation in 2013-14 remained in single digits (8.6%) for the second consecutive year, with the SBP expecting the CPI to clock up at 7.5%-8.5% in 2014-15.
Compared to 15.9% in 2012-13, the year-on-year growth in broad money decelerated to 12.5% in 2013-14, which is the lowest monetary expansion during the last three years.
Higher external inflows starting in February also substituted part of government borrowings from the banking system. Government borrowings for budgetary support from the banking system clocked up at Rs303 billion in 2013-14, which is only 21% of Rs1,446 billion borrowed in 2012-13.
Yet the SBP’s central board of directors chose to keep the rate flat for the next two months, saying ‘challenges and vulnerabilities remain’.
No wonder many observers have raised questions about the autonomy of the SBP when it comes to bi-monthly discount rate revisions.
A question mark over independence
Speaking to The Express Tribune, Topline Securities CEO Mohammad Sohail said it was difficult to understand the SBP’s rationale to maintain the discount rate at 10%. “All fundamentals are in favour of a reduction in the interest rate,” he said referring to the CPI, foreign exchange reserves and government borrowings. “It looks like some other force is stopping the SBP board from taking the rate cut decision.”
Replying to a question about the perceived lack of autonomy, the SBP governor said the central bank functioned free from any external pressure. “The SBP central board of directors is fairly independent. We believe we have autonomy in deciding the monetary policy and have no issues there.”
Published in The Express Tribune, July 20th, 2014.
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