By CentralBankNews.info
Pakistan’s central bank held its policy rate steady at 10.0 percent, as expected, saying inflation is slightly lower but there are still risks to the balance of payments position from uncertainty surrounding foreign capital inflows.
The State Bank of Pakistan (SBP), which raised its rate in September and November by 100 basis points to limit inflation and capital outflows, said it expects inflation on average in the 2014 financial year, which began on July 1, 2013, to be between 10 and 11 percent, higher than the government’s 8 percent target.
In December Pakistan’s inflation rate eased to 9.2 percent from 10.9 percent in November. Inflation in 2013 was affected by a rise the general sales tax, the imposition of value added tax on some manufactured items and an adjustment in electricity tariffs as the government reduced its deficit.
In contrast, inflation on imported goods has remained subdued despite a decline in Pakistan’s rupee due to a deceleration in international commodity prices.
“Going forward, weak global economic conditions may contain the price elastic demand for imported products, hence keeping the imported CPI inflation low in 2014,” the SBP said, adding that lower government borrowing will also reduce inflationary pressures.
Economic activity has remained sluggish for the last five years and it will take some time before the pick-up in economic growth pushes up demand.
The SBP noted an increase in market interest rates since October that has brought overnight money market rates close to the ceiling of the bank’s 2.5 percentage point corridor, and on average overnight repo rates have been 51 basis points over the middle of the SBP’s corridor since September.
“A relatively higher increase in short-term rates compared to long term rates indicates markets’ expectation of a further increase in the policy rate by SBP during FY 14,” the central bank said.
The rise in market rates has also helped check the depreciation of the rupee with the bank’s rate rise in September limiting its decline.
The rupee has depreciated by 7.8 percent since the start of 2013, hitting a recent low of 108.5 to the U.S. dollar in early December. Since then it has strengthened, trading at 105.4 today.
“Besides SBP interventions in the foreign exchange market, strong communication by both SBP and the government to contain speculative segments in the market helped in stemming the fall of rupee,” the bank said.
Pakistan’s overall current account deficit for the current 2014 fiscal year is projected to rise, but the SBP said it was not deemed very high by historical standards and does not pose a risk, though some of the financing is liked to privatization proceeds and the issuance of a eurobond.
“Absence of these flows could potentially result in a balance of payments deficit as against an anticipated surplus for FY14, ” the bank said, adding that together with net repayments to the International Monetary Fund, this suggests some risks to the balance of payments position.
