SBP increases interest rate by 100bps to 8.5 per cent

The State Bank of Pakistan (SBP) has decided to spike target policy rate by 100 bps to 8.5 percent effective from 1st October 2018 in order to further consolidate efforts required to ensure macroeconomic stability, it said in a statement.

The central bank said that though political uncertainty has relatively subsided due to smooth transition between governments, “concerns on the economic front continue to persist on the back of rising inflation and large twin deficits that are likely to compromise the sustainability of the high real economic growth path”.

“Inflation is inching up, particularly from March 2018 onwards. So far, in the first two months of FY19, headline CPI inflation has averaged 5.8 percent as compared to 3.2 percent for the corresponding months of FY18, and an average of 3.9 for all of FY18,” it said.

The bank said that for FY19, SBP’s inflation projections show that the average headline inflation is expected to fall in the revised forecast range of 6.5-7.5 percent. It cited higher than anticipated increase in international oil prices, increase in domestic prices, continuing second round impact of previous exchange rate depreciation, etc.

“The government is also now pursuing a fiscal consolidation program and has further announced regulatory measures to slowdown the growing pressures on the external front. As a result, domestic demand is projected to decelerate in the coming months of FY19,” it added.

The SBP projected the real GDP growth for FY19 at around 5.0 percent.

“The current account deficit continues to pose a challenge. Despite some growth in workers’ remittances and exports in the first two months of FY19, a notable increase in the value of oil imports has kept the current account deficit at US$2.7 billion, as compared to US$2.5 billion, in the corresponding period last year despite non-oil imports declining during the period. Owing to these developments SBP’s net liquid FX reserves have declined to US$ 9.0 billion as of 19th September, 2018 compared to US$ 9.8 billion at the end of FY18,” the statement added.

The bank further added that during 1st July to 14th September FY19 Private Sector Credit (PSC) performed relatively better, mainly due to conducive exports demand amid GSP plus status, improved availability of energy and higher working capital needs due to capacity additions in the last three years.