Monetary policy rate stay put.

Byline: Shabbir Kazmi

Monetary Policy Committee of State Bank of Pakistan (SBP) has decided to leave the policy rate unchanged at 13.25%. The decision reflects the Committee's view that recent developments have had offsetting implications for the inflation outlook. On the one hand, recent inflation outturns have been on the higher side. On the other, the causes behind these outturns have primarily been increases in food prices, which are expected to be temporary. Also market sentiment has begun to gradually improve on the back of sustained improvements in the current account and continued fiscal prudence. The SBP's projection for average inflation for FY20 remained broadly unchanged and maintaining the current monetary policy stance was appropriate. In reaching this decision, the Committee considered key developments since its last meeting, improvements in the real, external and fiscal sectors, and the resulting outlook for monetary conditions and inflation.

There have been three key developments since the last meeting: 1) the current account balance recorded a surplus in October 2019 after a gap of four years, a clear indication of receding pressures on the country's external accounts, 2) the government's primary balance is estimated to record a surplus in the first quarter of FY20, a first since Q2FY16. This, together with the end of deficit monetization has qualitatively improved the inflation outlook and 3) the most recent business confidence survey shows that businesses expect inflation to fall in the near term suggesting that inflation expectations remain anchored despite the recent increases in food prices.

Recent economic data suggest that economic activity is strengthening in export oriented and import competing sectors, while inward oriented sectors continue to experience a slowdown in activity. Specifically, large scale manufacturing (LSM) shows gains in electronics, engineering goods and fertilizer sectors and decline in auto, food, and construction allied industries of steel and cement. The latest production estimates of major Kharif crops suggest that agriculture sector is likely to grow in line with projections although cotton production is likely to remain below target.

The SBP has kept its projection for GDP growth for FY20 unchanged at around 3.5%. The external sector continued to show steady improvement, reflecting the benefits of recent policy adjustments and other factors. In the first four months of the current fiscal...