In line with market expectations, the State Bank of Pakistan (SBP) on Saturday kept the policy rate unchanged at 10% – a decision based on what the bank said were “stable macroeconomic conditions” after July. The policy rate – which is announced every two months – is the interest rate at which commercial banks borrow from the central bank’s discount window. The central bank uses this tool to control inflation by changing the level of money supply in the economy.According to a statement issued by the SBP, stable macroeconomic conditions were most visible in the headline inflation that dropped to 7% on a year-on-year basis in August, which is the lowest level since June 2013. The SBP expects growth in real economic activity to continue in 2014-15, with the shrinking budget deficit, contained government borrowings and an improved debt profile. Speaking to The Express Tribune, Standard Capital Securities Equity Research Analyst said

The decision to keep the policy rate on hold would not have any significant impact on the market. However, it would be largely positive for the banking sector, he added. According to the SBP, the declining inflation was broad-based since both measures of core inflation – non-food non-energy and trimmed mean – also decelerated year-on-year to 7.8% and 7.14% in August respectively compared to 8.7% and 7.9% in June. Noting that the future path of inflation matters more for the monetary policy decision, the SBP said the current outlook of around 8% average CPI inflation for 2014-15 might change adversely if electricity subsidy was cut and gas infrastructure development cess was levied.It noted that real economic activity started to show signs of revival in 2013-14 after recording a low growth since 2008. “Continuation of the current growth momentum primarily hinges on agriculture production,” it said.

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