By CentralBankNews.info
Pakistan’s central bank left its monetary policy rate at 5.75 percent, citing lower-than-expected inflation, improving domestic demand but challenging external balances.
The State Bank of Pakistan (SBP), which has maintained its rate since cutting it by 25 basis points in May 2016, noted headline inflation softened to 3.9 percent in June from 5.02 percent in May while core inflation was steady for the third consecutive month at 5.5 percent, indicating rising demand.
For financial year 2018, which began July 1, SBP forecast average inflation of 4.5 to 5.5 percent, adding this was due to lower than anticipated increases in oil prices, stable administered prices and lower inflationary expectations.
In its previous policy decision in May the central bank expected an increase in inflation on the back of rising income and imports, along with accelerating credit to the private sector. However, the SBP still expected inflation to remain within its target.
Today, the central bank confirmed it still expects inflation to remain below its 6.0 percent target, mainly due to favorable supply conditions.
Pakistan’s large-scale-manufacturing sector is showing strong positive momentum, with growth in July-May of 5.7 percent compared with 3.4 percent in the same period last year while the agriculture sector is improved from last year, reaching its growth target of 3.5 percent in FY17.
Pakistan’s current account deficit has been rising due to an underperformance of both exports and workers’ remittances, with a deficit of US$12.1 billion in fiscal 2017, up 148 percent from fiscal 2016, as imports surged due to higher machinery imports, and imports to upgrade plants.
But the SBP expects the balance of payments to remain manageable in fiscal 2017 due to steady financial account inflows and improved world economic growth that should boost exports while imports are expected to rise at a slower pace.
But based on the performance of exports in the last four months, the central bank said the decline in exports appears to have bottomed out.
The current account deficit has been managed by Pakistan’s foreign exchange reserves and a surplus on the financial surplus that reached US$9.6 billion in FY 17, up from $6.9 billion in FY16.
Reflecting a rise in private sector borrowing, the SBP’s foreign exchange reserves declined to $16.1 billion at the end of FY17 as compared to $18.1 billion in FY16.
The State Bank of Pakistan issued the following statement:
Reflecting further on CPI tendencies, the headline inflation (in YoY terms) has softened at 3.9 percent in June 2017, while core inflation has stayed at 5.5 percent since April 2017. The latter does indicate rising demand. However, marginally lower six-months ahead inflation expectations- captured by IBA- SBP’s Consumer Confidence Survey of July-2017, show that these remain reasonably anchored. Accordingly, SBP is projecting average CPI inflation in the range of 4.5 – 5.5 percent for FY18. This projection is explained by lower than anticipated increase in international oil prices, recent behavior of CPI inflation in June 2017, stable administered prices and lower inflationary expectations.
Turning to the real sector, cumulative LSM (YoY) growth statistics till May 2017 depict a strong positive momentum with food (especially sugar), steel, cement, automobiles, electronics and pharmaceuticals in the lead. Indeed, July-May LSM growth is 5.7 percent against 3.4 percent recorded during the same period last year. Furthermore, the outcome of agriculture sector is far superior to FY16 reaching its target of 3.5 percent in FY17. This performance is explained by better supplies of factors of production- positively affecting yields of all major crops, and an increase in area under cultivation of sugarcane. The services sector posted 6.0 percent increase in FY17 compared to 5.5 percent increase in FY16. Going forward, these developments will further entrench in FY18.
As far as the money markets are concerned, market liquidity was able to accommodate strong credit demand from the private sector. In fact, increased economic activity, considerable increase in bank deposits, and low interest rates translated into private sector credit flows in FY17 reaching a decade high of Rs748 billion as compared with Rs446 billion in FY16. It is encouraging that fixed investments and working capital loans grew by Rs 258.5 billion and Rs 360.5 billion in FY17 compared with an expansion of Rs 171.7 billion and Rs 219.3 billion last year, respectively. Demand for consumer financing, especially for auto and personal loans, also gathered pace during FY17. These trends are set to continue in FY18 given the developments on the real side.
On the external front, the current account deficit reached US$ 12.1 billion during FY17. While exports and workers’ remittances declined, imports growth surged by 17.7 percent in FY17. This is mainly owing to machinery imports both for CPEC and non-CPEC energy and infrastructure projects, whereas, imports for plant up-gradation under the ongoing export package for the textiles sector also added pressures. However, in view of the last four months performance, the decline in exports appears to have bottomed out.
Following detailed deliberations and taking into consideration the strong likelihood of continued growth momentum, contained inflation and the challenges on the external front, the Monetary Policy Committee has decided to maintain the policy rate at 5.75%.”
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