SBP increases key interest rate by 150bps to 12.25%.

ISLAMABAD: In order to address underlying inflationary pressures from higher headline/core inflation outturns, exchange rate depreciation, elevated fiscal deficit and potential adjustments in utility tariffs, the State Bank of Pakistan (SBP) on Monday increased the policy rate by 150 bps to 12.25% effective from May 21 (Tuesday).

The SBP said inflationary pressures are likely to continue for some time and the average headline CPI inflation is expected to be in the range of 6.5-7.5% in FY19 and anticipated to be considerably higher in FY20.

The SBP's estimates show that economic growth is expected to slow in FY19 but rise modestly in FY20. "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," the bank said. "Going forward, some gradual recovery in economic activity is expected on the back of improved market sentiment in the context of the IMF supported program, a rebound in the agriculture sector and government incentives for export-oriented industries," it hoped. Recent trade account indicators suggest the export volumes have begun to grow although total export receipts have not grown due to unfavourable prices, it added.

The SBP said despite improvement in the current account and a noticeable increase in official bilateral inflows, the financing of the current account deficit remained challenging. "Consequently, reserves declined to US$ 8.8 billion as of May 10, 2019, from US$ 10.5 billion at end-March 2019. The exchange rate also came under pressure in the last few days," the central bank said. 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. "SBP 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 statement added.

The bank said the current level of reserves is below standard adequacy levels (equal to three months of imports cover). Deep structural reforms are required to improve productivity and competitiveness of export-oriented sectors and improve the trade balance, it added.

"The overall fiscal deficit is likely to be considerably higher during Jul-Mar FY19 as compared to the same period last year due to a shortfall in revenue collection, higher than budgeted interest payments and security related...