KARACHI: State Bank of Pakistan (SBP) has maintained its policy rate for the fourth time in the 2014 unchanged at 10 percent citing its rationale behind the decision for mitigating risks to stabilise macroeconomic indicators and control inflation rate. The policy rate was last hike by 50 basis points to 10 percent in November 2013.
Governor SBP Ashraf Mahmood Wathra announced the Monetary Policy Statement (MPS) for the next two months at a press conference on Saturday.
Central Board of Directors of SBP independently on the basis of all grounds of financial derivates of the economy took the decision, he said.
Wathra said the economic conditions were certainly better at the beginning of 2014-15 than a year ago but a detailed assessment of the economy indicated challenges and vulnerabilities and he highlighted the needs of continuation of prudent policies and reforms to build on positive developments and to achieve protracted stability.
SBP is effectively managing market sentiments by supplementing the monetary policy stance with calibrated liquidity operations in the interbank market, adding ‘this has contributed in achieving stability in the foreign exchange market and in building foreign exchange reserves’. This has also facilitated the shift in banks’ investment from T-bills to Pakistan Investment Bonds (PIBs), improving domestic debt maturity profile of the government.
He said despite significant injections by SBP, appetite for liquidity remained sufficiently high in the market. It resulted in higher short-term interest rates, making rupee liquidity more expensive. This reduced pressure on exchange rate as it discouraged speculative holdings of foreign exchange and made trade financing through foreign currency deposits held by banks more attractive, said Wathra.
He said a significant reduction in government borrowings from the banking system is contributing towards low inflationary expectations and has provided necessary space to the private sector to borrow from the banking system. However, persistent energy shortages and deteriorating security conditions hint towards some risks to credit demand.
He maintained sustainability of lower government borrowings from the banking system, including SBP, is contingent upon further reduction in the fiscal deficit and continuation of external financing, adding that government needs to watch the fiscal position of FY15 i.e the revenue side cautiously.
Wathra said the growth in domestic debt during FY14 had decelerated to 14.5 percent, which was significantly lower than the average growth of around 27 percent during the last three years. This bodes well from the point of view of country’s risk perception and could help in attracting investment in the economy.
Governor SBP said the increase in external borrowings since February 2014 had provided a much needed respite and short-term stability to the balance of payments position. These foreign inflows resulted in a capital and financial account surplus of $6.1 billion, which comfortably financed the current account deficit of $2.6 billion and led to a significant increase in SBP’s foreign exchange reserves. By July 4, SBP’s foreign exchange reserves have increased to $9.6 billion.
He said the increase in SBP’s foreign exchange reserves brought about a shift in sentiments in the foreign exchange market and stabilised the exchange rate. “Moody’s Investors Service has revised the outlook on Pakistan’s foreign currency government bond rating to stable from negative.”
According to Governor SBP, the impetus of positive sentiments together with continuation of International Monetary Fund (IMF) programme and government’s privatisation plan is expected to result in further strengthening of the external position in FY15. However, sustaining this trend in the medium term, especially in the post IMF programme years, would require additional efforts and reforms.
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