KARACHI: The Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) has decided to maintain policy rate at 6.0 percent for the next two months.
According to the press release issued by SBPT, the latest information since MPC’s meeting in January 2018 reveals that the prospects of achieving an eleven-year high growth rate remains strong with average headline inflation within comfortable bounds for FY18 and FY19.
“This high growth and low inflation outcome has been accompanied by a higher current account deficit. Alongwith a high fiscal deficit, this could affect medium-term stability of the economy,” statement added.
However, recent adjustments stemming from greater exchange rate flexibility, active monetary management as well as visible improvements in exports and remittances are expected to bear fruit for medium-term in terms of sustaining the growth momentum without posing a risk to stability.
CPI inflation has remained moderate during Jan-Feb FY18, averaging 4.1 percent mainly, because of subdued food prices and lower than anticipated increase in house rents.
The latter lowered core inflation- i.e. non-food-non-energy inflation, from 5.5 percent (YoY) in December FY18 to 5.2 percent during January and February FY18. This lowering of core inflation is corroborated by successive iterations (including March FY18) of the IBA-SBP consumer confidence surveys, which depict relatively well-anchored inflation expectations.
Going forward, a sticky core inflation along with a moderate outlook of food prices amid abundant grain stocks and the recent increase in policy rate are expected to contain average inflation well below the FY18 target of 6.0 percent and close to it for FY19.
This assessment takes into account the lagged impact of exchange rate flexibility and its second round effects (specifically through adjustments in fuel prices), demand pressures, and volatile global oil prices.
Consequently, despite a late start of sugarcane crushing, LSM posted a growth of 6.3 percent during Jul-Jan FY18 as compared to 3.6 percent during the corresponding period in FY17. Due to transition of fixed investment into additional productive capacity and with favorable trend in global demand, LSM growth is expected to maintain its current momentum in the remaining months of FY18 as well.
Although the full impact of recent exchange rate depreciations on exports and imports is going to unfold gradually in the coming months, financing of the high current account deficit is challenging as a healthy growth in FDI and higher official inflows were insufficient to finance it completely. Consequently, SBP’s foreign exchange reserves declined to USD 11.78 billion as of March 22, 2018, the release added.