The State Bank of Pakistan may keep its policy rate unchanged in its first independent Board of Directors’ meeting next Saturday following the lower inflation rates and slight upward trend in international oil prices.
The analysts claimed that in the last meeting, six members of the Board of Directors proposed not to cut the policy rates and there is hope that the committee will also keep it unchanged when it meets next Saturday.
In the last meeting of January 2016, the SBP kept discount rates unchanged at 6 per cent. Central bank revises benchmark interest rates regularly to ensure price stability and to help government achieve economic growth targets.
Umair Naseer, analyst at Topline brokerage house, said, “The SBP will try to keep the policy rate unchanged in the next monetary policy meeting, as the prices of international oil have reversed in last two weeks and touched $40 per barrel in the international market.”
He said the rising trend in oil prices will force the SBP to keep the discount rate at 6 per cent for the next two months and if the oil prices go down in future it may cut another 50 basis points in the next monetary policy meeting in June 2016.
Analyst of AKD brokerage house said that due to the inflation outlook, they still expected that SBP may further reduce policy rate by 50bps to 5.5 per cent during 2016. However, the government has increased the rates of petroleum products, which definitely indicates that prices of different commodities and the inflation may increase.
Inflation expectations play a key role in the formulation of monetary policy. Central banks ‘tighten’ monetary policy by increasing the benchmark index rate when they expect upward inflationary pressures building up.
CPI inflation for the month of March 2016 clocked in at 3.9 per cent, which was in line with expectations and slightly below February’s inflation of 4 per cent. On MoM basis, inflation increased by 0.15 per cent in March 2016 compared to a decline of 0.25 per cent during the previous month.
Despite being low on monthly basis, inflation sustained at around 4 per cent for two months in a row because of low base effect of last year.
The analysts forecast the inflation to come down as low base effect of last year wears off and expect June 2016 inflation to stay at around 3 per cent. The average inflation for 2015-16 will be at 2.75 per cent, below SBP’s inflation range of 3-4 per cent.
Pakistan’s oil import bill during the last eight months of the current fiscal year has fallen to $5.5 billion compared to $9.0 billion last year, down 39 per cent or $3.5 billion. Even though benefit of lower oil prices is significant, it has not fully translated in the external account due to corresponding increase in non-oil imports and decrease in exports.
Total imports have fallen to $26.3 billion during this period compared to $27.9 billion, down only 5.8 per cent ($1.6 billion). This is because higher purchasing power resulted in increased consumption, which resulted in higher imports of non-oil products. Imports other than oil have increased by 10 per cent ($1.9 billion) to $20.8 billion, compared to $18.9 billion during the same period last year.
Other than higher non-oil imports, reduced exports due to lower commodity prices are also taking a toll on the overall trade balance, which has only improved by $88 million to $1.85 billion during July-Feb 2015-16. Exports amounted to $14.4 billion during the first eight months 2015-16, down 9.9 per cent from $15.9 billion during the same period last year.
In other words, high international oil prices strain the country’s fiscal finances leading to higher borrowing by the government and lower allocation for developmental projects.
The SBP brought down the policy rate by 300 basis points in 2014-15. It further reduced the target rate from 6.5% to 6% in its September 2015 announcement. However, it has opted for status quo in the two bi-monthly monetary policy announcements since then.
Until now the Board of Directors of the central bank, which has representation from the Ministry of Finance, would set the monetary policy direction. But following amendments to SBP Act 1956 under the current loan programme with the IMF, an independent Monetary Policy Committee has now been set up. The committee has three independent economists and no direct representative of the federal government.
In this connection, the SBP announced the names of the new Board of Directors last week. The board members include Governor of the board Ashraf Mahmood Wathra, Deputy Governor Saeed Ahmad, Zafar Masud, Mohammad Riaz and Ardeshir Khursheed Marker. The internal members include Deputy Governor (Policy) Riaz Riazuddin and Executive Director-BSG Jameel Ahmad. The external members are Dr Asad Zaman, Dr Qazi Masood Ahmed and Dr Aliya Hashmi Khan.