On Monday, The State Bank of Pakistan (SBP) announced its Monetary Policy, the Monetary Policy Committee (MPC) decided to leave the policy rate unchanged at 13.25 percent.
“The decision reflected the MPC’s view that the inflation performance was largely in line with expectations and that the inflation projections for FY20 remained unchanged since the last MPC meeting on July 16, 2019. The MPM also estimated that, based on available information, the current stance of monetary policy inflation should be reduced to the target range of 5-7% over the next twenty-four months,” said in a press release issued by State Bank of Pakistan.
The statement added that in reaching this decision, the MPC considered key economic developments since the last meeting particularly in the real, external and fiscal sectors, and resulting outlook for monetary conditions and inflation.
The MPC also considered risks to the outlook for inflation. “The inflation could rise above the baseline projections in case of fiscal slippage or other adverse developments. On the other hand, inflation could begin to fall earlier than expected if oil prices decline, aggregate demand slows faster than expected, or the exchange rate appreciates.”
The MPC noted two key developments since the last MPC meeting,
First, the interbank foreign exchange market had adjusted relatively well to the introduction of market-based exchange rate system.
Second, on the external front, the US Fed, as anticipated, reduced its policy rate by 25 basis points (bps), followed by policy rate cuts by other major central banks around the world. This would help in lowering pressures on emerging markets’ currencies and potentially increase financial inflows.
According to SBP, the rupee had strengthened modestly against the US dollar, unlike its previous trend.
The State Bank also forecasted that recent economic activity indicators have shown a gradual slowdown, in line with earlier expectations. “The MPC continued to expect average growth in FY20 of around 3.5 percent.”
The MPC noted that the LSM index does not fully capture activity in some key industries such as high value-added textile products.
The MPC also noted that the SBP-IBA Consumer and Business Confidence Surveys conducted during Aug-Sep 2019 show a modest improvement in the outlook for the economy.
“The outlook for agriculture and the services sectors was largely unchanged from the time of the previous MPC meeting. The agriculture sector growth is expected to improve considerably in FY20 over the last fiscal year while growth in services is expected to moderate gradually,” said a press release.
The State Bank continued to expect that economic activity would gradually turn around as business sentiment improves.
Figures showed that fiscal policy had been considerably more expansionary in FY19 than earlier expected with a primary deficit of 3.5 percent of GDP and an overall fiscal deficit of 8.9 percent of GDP. On the other hand, tax revenues (net of refunds) had grown considerably in July and August of FY20.
The MPC noted that inflation developments were broadly similar between the new and the old base CPI: inflation had gradually risen over the previous months and remained high in both year-on-year and month-on-month terms.
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