SBP increases policy rate to 6.5%

The State Bank of Pakistan on Friday increased the policy rate by 6.5% effective from May 28, citing reasons such as increase in international oil prices, exchange rate, food inflation as the reasons.
Pakistan’s economic growth is provisionally estimated to achieve a 13-year high of 5.8 percent for FY18. Concurrently, headline inflation remains moderate and is expected to stay well below the annual target of 6.0 percent, the bank said in a statement.
“However, since the last meeting, in the Monetary Committee Policy’s assessment the balance-of-risks to the sustainability of the healthy-growth-low-inflation nexus have shifted due to the following reasons. First, the balance- of-payments picture, despite an increase in exports and some deceleration in imports, has further deteriorated due to a sharp increase in international oil prices and limited financial inflows to date.
Second, the revised estimate for fiscal deficit stands at 5.5 percent of GDP as compared to initial target of 4.1 percent for FY18, reflecting a significantly higher level of fiscal expansion than previously anticipated. These twin deficits- depicting the elevated aggregate demand in the country, are adversely affecting the near-term macroeconomic stability,” it said.
The banks said the average inflation for FY18 is projected to remain within SBP’s model-based range of 3.5-4.5 percent whereas the average FY19 inflation is estimated to be marginally above the annual target of 6 percent.
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 3.5 percent.
Meanwhile, industrial sector grew by 5.8 percent, primarily because of vibrant construction activity and notable improvement in large-scale manufacturing. These gains in the commodity-producing sector along with growing aggregate demand have pushed the growth in services to 6.4 percent.
Keeping in view this strong growth momentum and the upcoming investments in auto and construction allied industries, the government has set the real GDP growth target of 6.2 percent for FY19, the bank said.