KARACHI: The State Bank of Pakistan (SBP) on Saturday left its policy rate unchanged at 5.75 per cent for the next two months citing an increasing inflation as the real cause of this cautious approach.

“The year-on-year CPI [Consumer Price Index] inflation rose to 3.6 per cent in August 2016 from 1.8pc in August 2015, while the average inflation during the first two months of the current fiscal year was more than double the same period last year,” the central bank observed in its Monetary Policy Statement (MPS).

Similarly, the core inflation during this period was also higher than the last year. The policy rate was kept unchanged in last monetary policy review in July 2016.

The statement said the expected pick up in domestic demand is largely going to determine the inflation path in the remaining months of 2016-17. Uncertain global oil price continues to remain a major determining risk, said the SBP.

While year-on-year increase in monetary aggregates (M2) was 13.9pc on Sept 9, 2016 compared to 13.5pc on Sept 11, 2015, it recorded seasonal contraction of 1.1pc in July 1- Sept 9 2016-17 as against a 1.3pc contraction in the comparable period of FY16.

Liquidity conditions in the money market remained broadly comfortable mainly due to debt retirement by the government to the scheduled banks. The volatility, therefore, in the inter-bank market was low as the overnight money market repo rate mostly remained close to the policy rate.

“The ongoing stability in the market interest rates, with weighted average lending rates already at 12-year low in July 2016, is going to be instrumental during the start of the upcoming credit cycle for working capital and also for fixed investment,” said the SBP.

While the global growth outlook for 2016 is subdued, trend in international oil prices remains uncertain. Similarly, anticipation of the impact of interest rate hike by the US Federal Reserve, slowdown in the Chinese economy, and aftermath of Brexit on international financial and commodity markets is building up on this prevalent uncertainty, noted the central bank.

Pakistan has fared well so far owing to supporting macroeconomic environment and the record-high foreign exchange reserves have supported stability in the foreign exchange market.

“However, the current account deficit is expected to widen further owing to declining exports and rising imports,” the SBP said.

The State Bank said as the China-Pakistan Economic Corridor (CPEC) related projects are gathering momentum, the economy is projected to further expand at the back of improving industrial activity, especially construction and power generation, and rising demand for allied services.

Analysts generally welcomed the move to keep the interest rate unchanged saying that it could only help the government which is the single largest borrower.

“Tactically, it is better that the central bank kept interest rates unchanged, because a rate cut now would shift traders mind-set that interest rates have bottomed out. This could potentially put a surge on interest rates in secondary market bond trading and hurt government borrowing targets,” said Faisal Mamsa, CEO of Landmark Capital.

“The government is the biggest borrower and from that perspective some quarters would be very keen to see lower interest rates, but it does not justify a rate cut. Pakistan’s interest rate is lowest in the region and it has still failed to stimulate growth,” said Eman Khan of Tresmark.

Published in Dawn September 25th, 2016