Tag: Monetary Policy

KARACHI: State Bank of Pakistan (SBP) on Friday announced monetary policy for next two months and kept the key policy rate unchanged at 13.25 percent owing to higher inflation.

“The decision reflected the MPC’s view that recent developments have had offsetting implications for the inflation outlook,” a SBP statement said.

On the one hand, recent inflation outturns have been on the higher side. On the other, the causes behind these outturns have primarily been increases in food prices which are expected to be temporary.

Also market sentiment has begun to gradually improve on the back of sustained improvements in the current account and continued fiscal prudence.

The MPC noted that the SBP’s projection for average inflation for FY20 remained broadly unchanged at 11 – 12 percent and maintaining the current monetary policy stance was appropriate.

In reaching this decision, the MPC considered key developments since the last MPC meeting, developments in the real, external and fiscal sectors, and the resulting outlook for monetary conditions and inflation.

The monetary policy committee observed that there have been three key developments since the last MPC meeting. One, the current account balance recorded a surplus in October 2019 after a gap of four years, a clear indication of receding pressures on the country’s external accounts.

Two, the government’s primary balance is estimated to record a surplus in the first quarter of FY20, a first since Q2-FY16. This, together with the end of deficit monetization has qualitatively improved the inflation outlook.

Three, the most recent business confidence survey shows that businesses expect inflation to fall in the near term suggesting that inflation expectations remain anchored despite the recent increases in food prices.

Recent economic data suggest that economic activity is strengthening in export oriented and import competing sectors while inward oriented sectors continue to experience a slowdown in activity.

Specifically, large-scale manufacturing (LSM) shows gains in electronics, engineering goods and fertilizer sectors and decline in auto, food, and construction allied industries of steel and cement.

The latest production estimates of major kharif crops suggest that agriculture sector is likely to grow in line with projections although cotton production is likely to remain below target. In sum, the SBP kept its projection for GDP growth for FY20 unchanged at around 3.5 percent.

The external sector continued to show steady improvement, reflecting the benefits of recent policy adjustments and other factors.

In the first four months of the current fiscal year, the current account deficit contracted by 73.5 percent to US$ 1.5 billion.

This improvement reflected a notable reduction in imports, a modest growth in exports and steady workers’ remittances. Export volumes, especially of rice, textile made-ups, leather products, and fish & meat, increased despite weakening external demand.

The capital and financial account have also improved due to higher FDI and continued portfolio inflows reflecting renewed investor confidence.

On account of favorable balance of payment developments, the rupee has appreciated 5.6 percent since its low in June 2019. These favorable developments have allowed the SBP to begin rebuilding gross reserves and reducing liabilities.

Since the beginning of the fiscal year, gross reserves have risen by US$1.16 billion through November 15 and the SBP has reduced its foreign currency swaps / forward liabilities by US$1.95 billion through end October.

The combined increase in net reserves from these two sources is well in excess of the US$863 million Special Convertible Rupee Account (SCRA) portfolio inflows in government securities since the beginning of the fiscal year.

Fiscal consolidation gained traction during the year to date on account of broad-based taxation reforms and strict control over non-development expenditures.

FBR tax collections grew 16.2 percent (y/y) in Jul-Oct FY20 compared to 6.4 percent during the same period last year. On the expenditure side, the federal releases for public sector development programs (PSDP) more than doubled to Rs 257 billion during Jul-Oct FY20 from Rs 105.5 billion during the same period last year.

The increased infrastructure spending is expected to stimulate business activity in construction-allied industries. On the financing side, the government has strictly adhered to its commitment of zero fresh budgetary borrowing from SBP, which has not only helped the government meet its continuous performance criteria under the IMF program, but also bodes well for the inflation outlook.

The MPC emphasized that continued fiscal prudence would remain critical for sustaining the improving market sentiment.

Private sector credit fell by Rs 4.1 billion during the first four months of the current fiscal year compared to an expansion of Rs 223.1 billion during the same period last year on account of slowing economic activity. However, fixed investment loans increased, supported by the SBP’s long term financing facility under which loans grew by Rs 11.3 billion during this period.

Inflation (based on the new index) rose 11 percent (y/y) and 1.8 percent (m/m) in October 2019. These outturns, especially recent month-on-month outturns, were somewhat higher than expectations but largely reflected upward adjustments in administered prices and rise in prices of food items primarily due to temporary supply disruptions.

The MPC noted that recent outturns of month-on-month inflation had been higher than in previous months and if sustained could affect inflation expectations.

Nevertheless, in light of the temporary nature of these increases, continued softness in domestic demand, and recent appreciation of the currency on the back of improving market sentiment, the MPC was of the view that inflationary pressures were expected to recede in the second half of the fiscal year, as noted in the last MPS.

The MPC noted that the current stance of monetary policy and real interest rates on a forward-looking basis were appropriate to bring inflation down to the target range of 5 – 7 percent over the next twenty-four months.

KARACHI: State Bank of Pakistan (SBP) likely to keep policy rate unchanged in upcoming monetary policy, analysts said on Tuesday.

The analysts at Arif Habib Limited said that the monetary policy committee of SBP will convene on Friday (22nd November 2019) to announce the monetary policy for the next two months.

We expect the SBP to keep policy rates unchanged in the upcoming monetary policy statement. Despite significant reduction in yields of 10-yr PIB, T-Bills, and revision on National Savings Scheme (NSS) rates, we see a status quo stance due to the following reasons:

i) Inflation is likely to remain elevated in upcoming months and expected to peak out in January 2020 at 12.50 percent which would reduce real interest rates to 75bps (compared to last 10 months average of ~290bps),

ii) Government is expected to continue attracting foreign investment in T-Bills to increase foreign exchange reserves, and

iii) Monetary easing might have negative repercussions on the current account and exchange rates.

To recall, SBP kept policy rate unchanged in last monetary policy statement (held on 16th September 2019) on account of

i) Inflation forecast which was broadly similar between new and old base (11-12 percent for FY20),

ii) Higher core inflation, and iii) Regular adjustment in utility prices and increase in food prices could pose upside risk to inflation forecast.

KARACHI: State Bank of Pakistan (SBP) will announce monetary policy on Friday, November 22, 2019 for next two months, said a statement on Monday.

The SBP kept the policy rate unchanged at 13.25 percent in its monetary policy announcement on September 16, 2019.

In the previous monetary policy, the SBP noted two key developments since the last MPC meeting.

First, the interbank foreign exchange market had adjusted relatively well to the introduction of the market-based exchange rate system.

The initial volatility and associated uncertainty in the exchange market had subsided.

Reflecting these improved sentiments and continued adjustment in the current account, the rupee had strengthened modestly against the US dollar since the last MPC, unlike its previous trend.

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.

KARACHI: The State Bank of Pakistan (SBP) on Monday kept the policy rate unchanged at 13.25 percent for next two months considering the present discount rate to help in reducing inflation in next two years.

The Monetary Policy Committee (MPC) of the SBP on Monday decided to leave the policy rate unchanged at 13.25 percent.

“The decision reflected the MPC’s view that inflation outcomes have been largely as expected and inflation projections for FY20 have remained unchanged since the last MPC meeting on 16th July, 2019.

The MPC also viewed that, based on available information, the current stance of monetary policy was appropriate to bring inflation down to the target range of 5 – 7 percent over the next twenty-four months.”

In reaching this decision, the MPC considered key economic developments since the last MPC meeting, developments in the real, external and fiscal sectors, and the resulting outlook for monetary conditions and inflation.

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 the market-based exchange rate system.

The initial volatility and associated uncertainty in the exchange market had subsided. Reflecting these improved sentiments and continued adjustment in the current account, the rupee had strengthened modestly against the US dollar since the last MPC, unlike its previous trend.

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.

Recent economic activity indicators show a gradual slowdown, in line with earlier expectations, and the MPC continued to expect average growth in FY20 of around 3.5 percent.

The slowdown is more pronounced in domestic oriented industries such as automobiles and steel. This trend is also reflected in the Large-scale Manufacturing (LSM) index which contracted by 3.6 percent in FY19, somewhat more than earlier expectations.

On the other hand, the MPC noted that the LSM index does not fully capture activity in some key industries such as high value-added textile products.

Export volumes have been growing briskly even though the growth in export dollar proceeds has been less pronounced due to declining international unit prices. The MPC also noted that the SBP-IBA Consumer and Business Confidence Surveys conducted during August-September 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. In sum, the MPC continued to expect that economic activity would gradually turn around as business sentiment improves.

The external sector continued to show significant improvement with a sizeable reduction of around 32 percent (or 1.5 percent of GDP) in the current account deficit during FY19. The trend continued in the first month of FY20 as well.

Specifically, driven by an encouraging 11 percent growth in exports and a contraction of 25.8 percent in imports, the current account deficit declined to US$ 579 million in July 2019 compared to US$ 2,130 million in the same period last year.

“This, together with the disbursement of program related inflows and activation of the Saudi oil facility, helped to build SBP’s foreign exchange reserves, which as of 6th September 2019, stood at US$ 8.46 billion. This is an increase of around US$ 1.18 billion from the end June FY19 level.”

The improvements in the balance-of-payments and market sentiment allowed SBP to reduce its forward short liability position and hence increase its net international reserves.

Recent developments in the fiscal sector had been mixed. On the one hand, revised 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 which suggested that the economic slowdown may not be as pronounced as may have been feared. The MPC noted that fiscal prudence and meeting the program targets is essential to sustaining the improvement in macroeconomic stability.

On a cumulative basis, private sector credit (PSC) contracted by 1.3 percent in Jul-Aug FY20 showing the results of previous monetary tightening.

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. Core inflation had also risen in recent months.

These developments were in line with the SBP’s earlier projections and reflected the pass-through of earlier exchange rate depreciation, adjustment in utility prices, and an increase in food prices.

In sum, the MPC expected inflation to average 11 – 12 percent in FY20.

The MPC also considered risks to the inflation outlook. On the one hand, 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.

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SBP increases key policy rate by 100bps to 13.25 percent

KARACHI: State Bank of Pakistan (SBP) will decide key policy rate for next two months on Monday, September 16, 2019. The present policy rate is 13.25 percent.

The central on Thursday said that the Monetary Policy Committee of the SBP will meet on Monday, September 16, 2019 at SBP Karachi to decide about Monetary Policy.

Later on, SBP will issue the Monetary Policy Statement through a press release on the same day.

In its meeting on July 16, 2019, the Monetary Policy Committee (MPC) decided to raise the policy rate by 100 basis points to 13.25 percent with effect from July 17, 2019.

The decision takes into account upside inflationary pressures from exchange rate depreciation since the last MPC meeting on May 20, 2019 and the likely increase in near term inflation from the one-off impact of recent adjustments in utility prices and other measures in the FY20 budget.

The decision also takes into account downside inflation pressures from softening demand indicators.

Taking these factors into consideration, the MPC expects average inflation of 11 –12 percent in FY20, higher than previously projected.

Nevertheless, inflation is expected to fall considerably in FY21 as the one-off effect of some of the causes of the recent rise in inflation diminishes.

KARACHI: The State Bank of Pakistan (SBP) is scheduled to announce its monetary policy on July 16, 2019 (Tuesday) and analysts forecast central bank may increase key policy rate by another 100 basis points.

Analysts at Arif Habib Limited said that the central bank to increase its policy rate by 100bps to 13.25 percent.

“Primary reason for this increase in policy rate, in our view, is to keep Real Interest Rates positive in light of rising inflation during 1QFY20 on the back of increase in the prices of administered utilities (electricity and gas).”

Average inflation for 1QFY20 is expected to settle at 12.11 percent, while a policy rate of 12.25 percent would imply a real interest rate of just 14bps.

The data for the past 48 months exhibits that average real interest rates have remained approx. 2.3 percent, while under the last IMF program (September 2013 to September 2016) real interest rates hovered at an average of 3.1 percent.

Therefore, it seems unlikely that the central bank would let the real interest rates go negative or below one percent. The staff report document also states that real interest rates would be kept positive to counter inflation.

On the external front, persistent Current Account Deficit continues to weigh in on the economy despite a substantial decline in imports.

For May 2019, CAD has declined by 47 percent YoY to USD1.1 billion. However, in terms of GDP it is still high at 5 percent.

Therefore, in order to reduce this deficit to a sustainable level, the SBP is expected to increase its policy rate to compress demand further.

In addition, with the advent of market determined exchange rate, a persistent Current Account Deficit might result in further weakness in exchange rate which might induce further inflation.

KARACHI: State Bank of Pakistan (SBP) will announce key policy rate for next two months of July 16, 2019, a statement said on Friday.

The SBP said that the Monetary Policy Committee of the central bank would meet on Tuesday, July 16, 2019 at SBP Head Office Karachi to decide the policy rate.

In the previous monetary policy announced on May 20, 2019, the committee decided to increase the policy rate by 150 basis points to 12.25 percent effective from May 21,2019.

The decision was taken into account the considerations and the evolving macroeconomic situation, the committee noted that further policy measures are required to address underlying inflationary pressures from (i) higher recent month-on-month headline and core inflation outturns; (ii) recent exchange rate depreciation; (iii) an elevated fiscal deficit and its increased monetization, and (iv) potential adjustments in utility tariffs.

Analysts at Arif Habib Limited said that the SBP would adopt a proactive stance to increase its benchmark policy rate by 100 basis points in July 2019 to address the underlying pressure on the economy.

In its report issued on June 28, the analysts said that in addition, monetary tightening is expected on the back of i) rising inflationary pressure due to increase in prices of petroleum products, essential food items and price revision of utilities, ii) an elevated fiscal deficit and its increased monetization, and iii) recent exchange rate depreciation.