Pakistan’s central bank hikes interest rate

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Web Report

Karachi – The central bank of Pakistan on May 25 announced an increase in its policy rate by 50 basis points to 6.5 per cent and said that balance of risks to the sustainability of growth has shifted while current account deficits and fiscal deficits have exceeded the earlier estimates.

The State Bank of Pakistan (SBP) announced the Monetary Policy Statement with details to justify the second increase in the interest rate during the current fiscal year. Last January, the SBP raised the key rate by 25 basis points to 6pc after keeping it steady for 20 months.

The central bank said the balance of risks to the sustainability of the healthy growth with low inflation has shifted due to deteriorating balance of payments and this was due to high petroleum prices and limited financial inflows.

Another reason for this imbalance was the revised fiscal deficit which was 5.5pc GDP as compared to 4.1 per cent for FY18.

“These twin deficits — depicting the elevated aggregate demand in the country — are adversely affecting the near-term macroeconomic stability,” said the SBP.

The central bank says that the economic growth is provisionally estimated to achieve a 13-year high level of 5.8pc for FY18. Concurrently, headline inflation remains moderate and is expected to stay well below the annual target of 6pc.

The CPI inflation remained 3.8pc during the first 10 months of this fiscal year while the food inflation clocked in 1.8pc during this period.

“Contrary to this, average of year-on-year NFNE (non-food non-energy) core inflation during the last two months has risen to 6.4pc, which reflects the building up of inflationary pressures in the economy,” said the SBP.

The average inflation for FY18 is projected to remain within SBP’s model-based range of 3.5-4.5pc whereas the average FY19 inflation is estimated to be marginally above the annual target of 6pc, said the SBP.

The SBP said turning to the supply side, the real sector has posted a broad-based healthy growth in FY18.

“Helped by strong growth in major crops and a modest increase in livestock, agriculture sector has not only recorded a notable improvement over the last year but also surpassed the annual growth target of 3.5pc per cent,” the central bank noted.