Monetary Policy Review: Unchanged inflation figures prevented monetary easing

November 25, 2019 (MLN): The Monetary Policy Committee of State Bank of Pakistan in its meeting held on Friday decided to keep the Policy Rate unchanged at 13.25%, owing to unchanged inflation numbers since the announcement of the last monetary policy.

According to a report by Foundation Securities, the Governor of State Bank, Dr. Reza Baqir considered a number of factors before arriving at the aforesaid decision. These factors pertain to the current state of the economy, i.e. inflation projections, business sentiments, and real interest rates.

As stated by a number of brokerage houses previously, the decision to keep the policy rate unchanged was in line with the notion that inflation numbers might surge in November on account of rise in the prices of Food and Energy. Going into detail of this, the Governor stated that the sharp rise in food group has been caused by supply constraints. Taking all else into consideration, the governor pronounced that the inflation for the Fiscal Year 2020 might settle within the range of 11 to 12%.

With regards to the Real Effective Exchange rate (REER) the governor remarked that Pakistan has performed a lot better in terms of regional competitiveness since 2018, and it would be beneficial for the country to see a positive change in REER instead of it going after a specific target.

Shedding some light on the Current Account Balance, Reza Baqir accredited foreign exchange reserves resulting from an increase in remittances, exports and decline in imports, as well as a decline in foreign liabilities for the influx of Current Account Surplus after nearly four years.

The Governor also expressed his confidence in Pakistan’s GDP growth, stating that it would reach 3.5% as the decline in the production of cotton would be counterbalanced by the increase in the production of rice. He further backed his statement by stating that the release of PSDP funds would generate immense economic activity within the sectors having to do with construction.

Another reports by State Bank of Pakistan stated that the overall business confidence in October 2019 improved from 45 in August 2019 to 48, which shows that pessimistic views of the business community about the economy have marginally decreased, resulting in an increase in the level of Business Confidence Index (BCI). However, it remained in the negative zone.

The index of perception for both industry and services improved but remained in the negative zone. In the case of services, the index increased from 46 in August 2019 to 49 in October 2019, while for the industry it increased from 43 to 45 during the same period.

On the contrary, the overall Consumer Confidence Index (CCI) declined by 5.3% and Overall Inflation Expectations declined by 0.2% compared to the previous survey conducted in September2019;

The change in CCI can be attributed to a moderate decline in the expected economic conditions index (EEC), which decreased by 2.8 percent and a significant decline in the current economic conditions index (CEC) by 8.3percent from its value in the previous survey

Inflation indices constructed from the survey data continued to show persistently high inflation expectations and a significant increase is seen in the energy index compared to the previous wave in September 2019.

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Posted on: 2019-11-25T13:32:00+05:00