Monetary policy: SBP leaves key interest rate unchanged at 5.75%

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SBP hikes interest rate to 10 percent

KARACHI: In line with market expectations, the State Bank of Pakistan (SBP) left the key interest rate unchanged at 5.75% for the next two months.
“The Monetary Policy Committee has decided to keep the policy rate at 5.75%,” a SBP press statement said on Friday.
The central bank has kept the discount rate unchanged at 5.75% since May 2016. This is the lowest level in four decades. It was in double digits at 10% in the first half of fiscal year 2012-13 before easing inflationary pressure led to a decline in the key interest rate.
Overall inflation in FY18 is expected to remain well below the target of 6%, the monetary policy statement said. Consumer price index (CPI) inflation averaged 3.5% during Jul-Oct FY18 – well below the annual inflation target.
Despite all the positive development, SBP’s foreign exchange reserves stand at $13.5 billion as on November 17, 2017 down from $16.1 billion at end June 2017. However, progress on the China-Pakistan Economic Corridor (CPEC) related projects and other official proceeds will be instrumental in managing the overall balance-of-payments deficit.
The introduction of regulatory duties is expected to help curb some growth in imports during the coming months.
Moreover, the financial account perspective shows that FDI inflows have risen, reaching $940 million by the end of October FY18 compared with $539 million during the same period last year, indicating improving sentiments regarding the economy.
The latest information reveals that economic activity is strong as corroborated by broad-based pick up in industrial output, gains in factors supporting production of major crops, and growth in private sector credit.
“The prospects of achieving 6% target of real GDP growth continue to be strong,” it added.
On the fiscal front, healthy growth in tax revenue collection by the Federal Board of Revenue (FBR) during the first quarter of FY18, 22% compared to the modest 4.5% during the same quarter of FY17, is a welcome development.
Near-term balance-of-payments challenges continue to persist. However, visible improvements in export growth, notable increase in foreign direct investments and expected other financial inflows will help contain these pressures.
A review of latest developments in the real sector show that during first quarter of FY18, large scale manufacturing (LSM) growth has surpassed its earlier expectations as it has been recorded at 8.4% compared with 1.8% in the corresponding period of FY17.
Due to improving security conditions and power supply, transformation of fixed investment into enhancements of productive capacity on the ground, low inflation and stable interest rates. Further support comes from the continuation of the CPEC projects. Barring any extreme seasonal events, agriculture sector is expected to perform better for the second consecutive year.

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