KARACHI: The State Bank of Pakistan (SBP) announced its monetary policy on Friday, increasing its key policy rate by 50 basis points to 10.75 per cent.
The policy was announced following a meeting of the central bank’s Monetary Policy Committee, which had raised the key policy rate by 25 basis points to 10.25 percent in January in the face of high fiscal and current account deficits and continuing inflationary pressures.
In its press release on Friday, the central bank said economic data since January showed that the impact of the government’s stabilisation measures continued to unfold and show its impact on the economy.
It said that the current account deficit had significantly contracted during the first two months of the year, which, together with bilateral inflows, helped ease pressures on the country’s foreign exchange reserves.
“These developments on the external front have improved stability in the financial markets, reduced uncertainty and improved businesses confidence, as reflected in various surveys. Nonetheless, despite narrowing, the current account deficit remains high, fiscal consolidation is slower than anticipated, and core inflation continues to rise,” it said.
Record inflation slows down domestic economic activity
The central bank noted that inflation had climbed to 6.5% in Jul-Feb FY19 compared to 3.8% the previous year, while year-on-year CPI inflation had risen considerably to 7.2% in Jan 2019 and further to 8.2% in Feb 2019—the highest year-on-year increase in inflation since June 2014.
“These pressures on headline inflation are explained by adjustments in the administered prices of electricity and gas, significant increase in perishable food prices, and the continued unfolding impact of exchange rate depreciation,” it said.
It added that rising input costs on the back of higher energy prices and the lagged impact of exchange rate depreciation were likely to maintain upward pressure on inflation, projecting CPI inflation to fall between 6.5% and 7.5% for the fiscal year.
Domestic economic activity continued to face the brunt of the prevailing inflationary pressures and widening macroeconomic imbalances, with Large-scale Manufacturing (LSM) declining by 2.3%, major crops depicting lackluster performance in the agriculture sector, and the slowdown in commodity producing sectors resulting in negative growth in services sector as well. The SBP pointed towards a similar deceleration in consumer demand and capital investments.
“In this backdrop, the real GDP growth is projected to be around 3.5 percent in FY19,” it said.