SBP keeps policy rate unchanged at 10pc

KARACHI: The State Bank of Pakistan (SBP) has decided to maintain the policy rate at 10 per cent, and it expects that average CPI inflation will remain around 8 per cent during FY15.

The decision was taken at a meeting of the Central Board of Directors of the SBP, chaired by SBP Governor Ashraf Mahmood Wathra, according to a handout issued here on Saturday.

The complete text of the decision is as follows: “Recent gains in confidence in the economy, backed by improvement in key indicators, need to be nurtured to ensure their sustainability. For instance, the average CPI inflation has remained in single digits during FY14 and policy vigilance is required for this trend to continue. Economic activity has improved and further reforms, especially in the energy sector, would help consolidate the momentum. Similarly, improvement in productivity and competitiveness is a must to continue to build foreign exchange reserves in the medium term while meeting external obligations.

“The year-on-year CPI inflation has remained volatile during FY14. It increased sharply till November 2013 then declined for few months before increasing again to 9.2 percent in April 2014. The average CPI inflation for July-April, FY14 is 8.7 per cent; higher than the year’s target of 8 per cent. The main reason for this volatility is unexpected movements in food prices and changes in administered prices. The core inflation, however, has remained quite stable at around 8 per cent over the past 12 months. Importantly, from the point of view of monetary policy, it is the outlook of inflation that matters.

“The SBP expects average CPI inflation to remain around 8 per cent during FY15, barring any exogenous shock. Basic factors supporting this assessment are: (i) moderate aggregate demand; (ii) deceleration in broad money growth led by contained government budgetary borrowings from the banking system; (iii) expectations of low inflationary pressures as indicated by SBP-IBA consumer confidence survey; and (iv) stable outlook of international commodity prices.

“Indicators of current economic activity are looking better as well. Provisional estimates of real GDP show a growth of 4.1 per cent for FY14. Encouragingly, this growth has been led by a 5.8 per cent increase in the industrial sector output. Examination of private credit data also points in the direction of improved economic activity. For instance, the flow of net credit to private sector was almost two and a half times more during the first nine months of current fiscal year compared to the corresponding period of last year. Similarly, the monthly average gross credit disbursements, arguably a better gauge of the nexus between credit and production, during the same period are about Rs150 billion higher this year.