The State Bank of Pakistan (SBP) on Friday raised the policy rate by 150 basis points to 10.0 percent to ensure macroeconomic stability.
Issuing Monetary Policy for next two months, the central bank said economic data released since the last Monetary Policy Committee meeting in September 2018 shows that the positive impact of recent stabilization measures has started to materialize gradually.
It says the current account deficit is showing early signs of improvement. However, the near term challenges to Pakistan’s economy continue to persist with rising inflation, an elevated fiscal deficit and low foreign exchange reserves.
It said the recent decline in international oil prices could potentially play a positive role in slowing down the current inflation trajectory the risks currently remain tilted towards the downside.
Average headline CPI inflation during the first four months of FY19 has increased to 5.9 percent as compared to 3.5 percent in the corresponding period of FY18. This trend is even more pronounced for core inflation, which indicates growing inflationary pressures in the economy.
It said a disaggregated analysis reveals that this is due to both, demand and supply side factors. Considering these developments, SBP projects average headline CPI inflation for FY19 in the forecast range of 6.5-7.5 percent, above the annual target of 6.0 percent.
Although the recent decline in international oil prices could potentially play a positive role in showing down the current inflation trajectory the risks currently remain titled towards the downside.
The policy said economic activity is expected to witness a notable moderation during FY19, reflecting a short term cost of pursuing macroeconomic stability. The lagged impact of the 275 basis point increase in the policy rate since January 2018 and other policy measures is likely to contain domestic demand during the current fiscal year.
Furthermore, initial estimates for major crops, except wheat, are expected to fall short levels achieved in the last year. The slowdown in commodity producing sectors is expected to limit the expansion in the services sector as well.
In this backdrop, SBP projects real GDP growth for FY19 at slightly above 4.0 per cent.
On the external front, import decelerated to 5.8 per cent during Jul-Oct FY19 from 26.3 per cent recorded in the same period last year reflecting the impact of recent tightening measures.