SBP keeps interest rate unchanged at 12.5pc

KARACHI: The State Bank kept the interest rate unchanged for two months on Saturday in the wake of reappearance of rising inflationary pressure, forcing the central bank to declare 12 per cent inflation for the current fiscal year.

“An upward adjustment in the interest rate, at this juncture, runs the risk of impeding the still nascent recovery, while a downward adjustment runs the risk of fuelling an already high inflation. Hence the SBP has decided to keep the policy rate unchanged at 12.5 per cent,” said the SBP monetary policy review.

The double-digit inflation has started moving upward, touching 13.7 per cent in January while in February it was 13 per cent, way beyond projections in the monetary policy.

The SBP has kept unchanged the interest rate at 12.5 per cent since September last year. It reduced the rate by a cumulative 150 bps during the first half of 2009-10, 100 bps in August and 50 bps in November last year.

According to analysts, the SBP decision of bi-monthly review appeared to be irrelevant because no change had been made despite many fluctuations in the domestic and global economy during this period.

“The SBP has kept the rate unchanged because of a concern that inflation may increase further while uncertainty on fiscal deficit and its financing forced the central bank to maintain its stance,” said Mohammad Sohail, chief executive of Topline Securities.

“After a low of 8.9 per cent in October last year, inflation slipped back largely due to increases in electricity tariff, adjustments in the prices of domestic petroleum products and administered prices of commodities like wheat,” said the monetary policy statement.

The SBP has held the government responsible for inflation, citing the rising electricity charges, petroleum prices and administrative expenses.

The central bank put the consumer price index (CPI) for 2009-10 at 12 per cent. In January, it had said CPI would vary between 11 and 12 per cent.

“Despite presence of high inflation, crippling electricity shortages and challenging security conditions, the domestic economic activity has picked up in recent months,” the SBP said, adding that a cumulative growth of 2.4 per cent in the large-scale manufacturing sector during the first seven months of 2009-10 was encouraging. It said the balance of payment had come down to $2.6 billion during the July-February period, allowing the SBP to accumulate foreign exchange reserves of up to $11.2 billion and helping it to stabilise the exchange rate. However, falling foreign direct investment and remittances were a source of concern, especially when prospects of foreign official flows remained unclear, it added.

“Of the Rs110 billion net external budget financing received during H1-FY10, Rs93 billion was provided by the IMF. With an understanding that this part of the IMF money, provided in lieu of FoDP (Friends of Democratic Pakistan) flows, is for short-term,” said the policy statement.

It said that a shortfall in revenue had compelled the government to borrow heavily from the State Bank and its outstanding amount stood at Rs1,240 billion, which was Rs110 billion higher than the quarterly limit.

The SBP said that non-retirement of debt availed for commodity operations and heavy borrowing by public sector enterprises were piling pressure on the banking system, while 22 per cent infected loans of SMEs and 17 per cent in agriculture might lead banks to stop credits altogether.