KARACHI - State Bank of Pakistan (SBP) has decided to keep the policy rate unchanged at 9.5 per cent.
The decision was taken by the Central Board of Directors of SBP at its meeting held here with Governor Yaseen Anwar in chair on Friday.
The decision to keep the policy rate unchanged was taken in view of the fact that the balance of payments position continues to be driven by low financial inflows and high debt payments. While the external current account deficit is expected to widen further in the remaining months of FY13, the net capital and financial inflows are not likely to increase considerably.
In addition, the SBP has to retire another $838 million of IMF loans during the remaining period of FY13 after making payments of $2.2 billion during the first three quarters of the current fiscal year. Due to these developments, the pressure on foreign exchange reserves is likely to remain in the coming months.
It was also observed by the Board that contrary to expectations, the year-on-year inflation has come down by 1.5 percentage points; from 8.1 per cent in January 2013 to 6.6 per cent in March 2013 posing divergent policy choices for the SBP. With the balance of payments position calling for caution, the declining trend in inflation indicates a possible resumption of ease in the policy rate.
In the monetary policy the SBP highlighted two main challenges for monetary policy: to manage the balance of payment position and to contain the possible increase in inflation. Since then, SBP’s foreign exchange reserves have declined by another $2 billion; from 8.7b at end-January 2013 to $6.7 billion as of 5th April 2013, mainly due to debt payments.
The main implication of fiscal imbalance for monetary policy is excessive borrowings from the banking system, including the SBP. During 1st July – 29th March, FY13, the fiscal authority has borrowed Rs853 billion (on cash basis) from the banking system for budgetary support compared with Rs925 billion in the corresponding period of last year and against a full-year estimate of Rs484 billion for FY13. The high level of these borrowings has kept an upward pressure on the system’s liquidity and thus market interest rates and is restraining growth in the private sector credit.