SBP announces monetary policy, increases interest rate to 12.25pc.

The State Bank of Pakistan (SBP) on Monday announced its monetary policy, increasing its benchmark interest rate by 150 basis points (bps) to 12.25 per cent, effective from May 21.

"The monetary policy committee [of the SBP] noted that further policy measures are required to address underlying inflationary pressures from higher recent month-on-month headline and core inflation outturns, recent exchange rate depreciation, an elevated fiscal deficit and its increased monetisation, and potential adjustments in utility tariffs," read an SBP statement.

The bank's estimates showed that economic growth was expected to slow in Fiscal Year 19 but rise modestly in Fiscal Year 20.

This slowdown is mostly due to lower growth in agriculture and industry. More than two-thirds of real GDP growth in FY19 is expected to come from services.

"Going forward, some gradual recovery in economic activity is expected on the back of improved market sentiment in the context of the IMF supported programme," added the statement.

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Talking about the external front, the SBP policy report mentioned that the current account deficit narrowed to $9.6 billion in Jul-Mar FY19 as compared to a deficit of $13.6bn during the same period last year, a fall of 29pc.

"The reduction is mainly driven by import compression and a healthy growth in workers' remittances. This impact was partially offset by higher international oil prices," it added.

According to the policy report, the non-oil trade deficit declined from $13.7b in Jul-Mar FY18 to $11b in Jul-Mar FY19.

"Recent indicators suggest export volumes have begun to grow although total export receipts have not grown due to unfavorable prices."

It said that foreign reserves declined to $8.8b as of May 10 from $10.5b at end-March 2019. "The exchange rate also came under pressure in the last few days. In SBP's view, the recent movement in the exchange rate reflects the continuing resolution of accumulated imbalances of the past and some role of supply and demand factors."

The SBP said that it will continue to closely monitor the situation and stands ready to take measures, as needed, to address any unwarranted volatility in the foreign exchange market.

The top bank noted that the current level of foreign reserves was below standard adequacy levels and...