KARACHI: The State Bank of Pakistan (SBP) in its Monetary Policy meeting held today announced a rise of 100 basis points in its Policy Rate to 8.5% in line with our forecast. In a broker poll of 27 correspondents, 8 had forecasted 100 basis points increase, 2 had forecasted 75 basis points increase, 16 had forecasted 50 basis points increase and 1 had forecasted status quo in today’s monetary policy decision.
State Bank has highlighted expanding external deficit, rising inflation and vulnerability to external shocks as key reasons. SBP has also revised down GDP growth for FY19 from 5.5% to 5%.
Foreign exchange reserves with SBP continue to decline and were reported at US$9bn as of September 19, 2018, down US$293mn over previous week. Further, for Jul-Aug’18, external current account deficit (CAD) was recorded at US$2.8bn, up 9.9% over last year.
Regarding inflation, State Bank expects inflationary pressures to gather pace and is forecasting inflation range of 6.5%-7.5% for FY19 as compared to 3.9% for FY18.
State Bank has shown concerns on global economic shocks in terms of volatility in oil prices and protectionist trade policies that may adversely affect Pakistan’s economic outlook.
SBP has aggressively raised interest rates by 275 basis points calendar year to date.
Topline Research believes this will partially help in containing demand and import growth. But more measures need to be taken on the fiscal side to control external account issues.