Monetary Policy: SBP raises interest rate to 6 percent

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Karachi (Web Desk): The State Bank of Pakistan (SBP) announced monetary policy on Friday, raised its main policy interest rate by 25 basis points to 6 percent, the bank’s governor said, citing the depreciation of the rupee.

While addressing a news conference, the central bank governor said the national economy was undergoing expansion given the rise in fiscal activity. He added the service sector has grown by 6%, while there has been a significant improvement on the construction front.

Pakistan’s economic growth is on track to achieve its highest level in the last eleven years.  Average headline inflation remains within the forecast range of SBP, but core inflation has continued to increase.  Fiscal deficit for H1-FY18 is expected to fall close to the last year’s 2.5 percent.

There has been visible improvement in export growth and remittances are marginally higher.  However, largely due to high level of imports the current account deficit remains under pressure. The exchange rate adjustment in December 2017 is expected to help ease the pressure on the external front.

Average headline inflation for H1-FY18 stands at 3.8 percent.  Meanwhile, core inflation (non-food-non-energy) continued to maintain its higher trajectory, and clocked in at 5.5 percent during the first half of the year as compared to 4.9 percent last year.

This together with a lagged impact of PKR depreciation and rising international oil prices are likely to increase inflation in the coming months. Taking into account the impact of all these developments, while the average inflation for FY18 is still projected to fall in the range of 4.5 to 5.5 percent, end of fiscal year YoY inflation is likely to inch towards the annual target of 6 percent.

On the external front, export receipts posted the highest growth in the last seven years of 10.8 percent in H1-FY18 against a reduction of 1.4 percent in H1-FY17.  Worker’s remittances also recorded growth (2.5 percent) during the first half of the year as compared to a decline in the same period last year.

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