September 16, 2019 (MLN): The Monetary Policy Committee (MPC) of the State Bank of Pakistan at its meeting today, has decided to maintain the benchmark interest rate at 13.25% for the next two months.
Having noticed the recent monetary easing in some foreign central banks, the SBP has decided to maintain status quo on policy rates and assess the macroeconomic conditions and uncertainties and how it would impact the domestic economy.
The decision reflected the MPC’s view that inflation outcomes have been largely as expected and inflation projections for FY20 have remained unchanged since the last MPC meeting on 16th July, 2019. The MPC also viewed that, based on available information, the current stance of monetary policy was appropriate to bring inflation down to the target range of 5 – 7 percent over the next twenty-four months.
In its last MPC meeting in July, the SBP decided to increase the policy rate by 100bps keeping in view the rising inflationary pressure.
The outcome of the meeting was in line with market expectations, wherein various analysts anticipated the policy rate to remain unchanged due to lower inflation figures, declining current account deficit, stable forex reserves and strengthening PKR.
In reaching this decision, the MPC considered key economic developments since the last MPC meeting, developments in the real, external and fiscal sectors, and the resulting outlook for monetary conditions and inflation.
The MPC also noted that the SBP-IBA Consumer and Business Confidence Surveys conducted during Aug-Sep 2019 show a modest improvement in the outlook for the economy. The outlook for agriculture and the services sectors was largely unchanged from the time of the previous MPC meeting. The agriculture sector growth is expected to improve considerably in FY20 over the last fiscal year while growth in services is expected to moderate gradually. In sum, the MPC continued to expect that economic activity would gradually turn around as business sentiment improves.
Similarly, the external sector continued to show significant improvement with a sizeable reduction of around 32 percent (or 1.5 percent of GDP) in the current account deficit during FY19. The trend continued in the first month of FY20 as well. This, together with the disbursement of program related inflows and activation of the Saudi oil facility, helped to build SBP’s foreign exchange reserves, which as of 6th September 2019, stood at US$ 8.46 billion.
However, recent developments in the fiscal sector had been mixed. On the one hand, revised figures showed that fiscal policy had been considerably more expansionary in FY19 than earlier expected with a primary deficit of 3.5 percent of GDP and an overall fiscal deficit of 8.9 percent of GDP. On the other hand, tax revenues (net of refunds) had grown considerably in July and August of FY20 which suggested that the economic slowdown may not be as pronounced as may have been feared.
The MPC also considered risks to the inflation outlook. On the one hand, inflation could rise above the baseline projections in case of fiscal slippage or other adverse developments. On the other hand, inflation could begin to fall earlier than expected if oil prices decline, aggregate demand slows faster than expected, or the exchange rate appreciates.
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