KARACHI: The State Bank of Pakistan (SBP) on Saturday kept its policy rate unchanged at 6 per cent, saying headline inflation is expected to reverse its declining momentum.

Average inflation, however, would still remain below the target of 6pc for this fiscal year, with a subdued outlook for prices of oil and other major commodities, said a monetary policy statement issued by the central bank.

Moreover, market surveys indicate a marginal increase in inflation expectations in the coming months, said the SBP.

Average inflation during July to October stood at 1.7pc compared to 7.1pc in the same period of last year. The decline was broad-based as indices for food, non-food and core inflation came down during the period.

Large-scale manufacturing (LSM), mainly supported by food and beverages, automobiles, fertilisers, and cement production, grew 3.9pc in the July-September quarter compared to 2.6pc a year ago.

The growth is expected to rise further on the back of expansion in cotton yarn manufacturing, strong construction, increased automobile production and improving energy supply on the back of recent LNG imports, said the policy statement.

Credit to the private sector increased nominally during July-October 2015, wherein fixed investments continued to expand for the fourth consecutive quarter — from second quarter of FY15 to first quarter of FY16.

“As a result of easy monetary policy, the weighted average lending rates on fresh and outstanding loans, at 7.8pc and 9.2pc in September 2015, are lowest in 10 years,” said the SBP. It said that with current credit cycle now entering in uptake phase and with improving LSM growth, borrowing on account of both the working capital and fixed investment is likely to increase.

“This outlook would reflect in broad money (M2) growth going forward, which during July 1 to Nov 6 has expanded by 0.2pc against 0.7pc during the same period last year.”

While the Net Domestic Assets fell Rs78 billion, Net Foreign Assets contribution in M2 growth remained substantial as it increased by Rs106 billion, said the central bank.

Current account deficit, despite a year-on-year 10.6pc contraction in exports, narrowed down to $532 million in July-October from $1.9bn a year earlier.

The improvement largely owes to declining oil price — that has substantially reduced the oil import payments, healthy workers’ remittances, and the realisation of Coalition Support Fund.

On the back of official disbursements and Eurobond inflows, surplus in capital and financial account has supported the overall balance of payments position, thus ensuring an upward trajectory in foreign exchange reserves during July to October.

“The continued flow of external resources would be required to maintain the stable balance of payments position. Furthermore, realisation of investment inflows stemming from the China-Pakistan Economic Corridor would indeed strengthen the external sector outlook over the medium to long term,” the State Bank said.

“In view of the foregoing, the board of directors of SBP has decided to keep the policy rate unchanged at 6pc.”

Published in Dawn, November 22nd, 2015