KARACHI - The State Bank of Pakistan has decided to keep the policy rate unchanged at 10 percent. The decision was taken by the Central Board of Directors of SBP at its meeting held under the chairmanship of Governor Ashraf Mahmood Wathra here on Saturday.

In recent months the rupee has remained mostly stable as the country has rebuilt its foreign exchange reserves. But the currency dipped slightly in the past month after PTI and PAT began their sit-ins in the federal capital demanding the resignation of the prime minister.

Since November 2013, the discount rate is unchanged at 10 per cent though trade and industry criticised it severely, particularly due to single-digit inflation. Researchers said that recent floods which were making a devastating impact on major crops, like cotton, rice and sugarcane, could push inflation higher in the coming months. The impact of floods will be felt from November. The food basket in CPI has large weightage and may change the declining trend, they added.

The flood has covered most part of Punjab and has entered Sindh. The details of devastations will reveal its real impact on economy and accumulated losses of crops, cattle, houses and other assets of flood victims. However, pressure on the exchange rate and increasing demand and low supply of the greenback was another reason that has forced the State Bank to keep the prevailing interest rate unchanged.

Pending IMF tranche is another reason that has forced the bank to follow IMF measure of keeping the real interest rate on positive side, an analyst said. Researchers said the IMF would not release stuck-up tranche until the government raises the electricity and gas tariffs. According to SBP governor, the post July monetary policy decision period continued to witness stable macroeconomic conditions. This was most visible in the headline variable of inflation that declined to 7.0 percent YoY in Aug 2014, which is its lowest level since June 2013. Moreover, after recording an improved 4.1 percent growth rate in FY14, real economic activity is expected to continue in FY15. The other highlight of this stability is the gains on fiscal liberalisation, shrinking budget deficits, contained government borrowings and improved debt profile.

He said following on the actual number of 8.6 percent in FY14, the average CPI inflation during Jul-Aug 2014 is recorded at 7.4 percent. This declining trend is broad based since both measures of core inflation, Non-Food Non-Energy (NFNE) and trimmed mean, also decelerated YoY to 7.8 percent and 7.14 percent in August 2014 as compared to 8.7 percent and 7.9 percent in June 2014, respectively.

Although actual low inflation might weigh positively on market sentiments, it is the future path of inflation that matters for monetary policy decision. The current outlook of around 8 percent average CPI inflation for FY15 might change adversely if the subsidy to electricity is cut and Gas Infrastructure Development Cess is levied.

Mr Wathra said, after demonstrating low growth since 2008, real economic activity started to show signs of revival in FY14. Continuation of the current growth momentum, however, primarily hinges on agriculture productions in FY15. This is because Large Scale Manufacturing (LSM) growth might remain constrained due to continued energy shortages; reduced production capacity of independent power plants; low supply of gas to fertiliser plants; lower domestic and international prices in the sugar sector; and higher inventories and slower exports growth prospects in food and textile sectors, respectively.

Incorporating the latest trends in exports and imports, oil payments in particular, trade deficit is going to dominate the composition of external current account deficit, even with a healthy growth in workers’ remittances. Declining private capital inflows, foreign direct investments in particular, would present continued challenges in managing the balance-of-payments position. In this regard, realisation of expected privatisation receipts and issuance of dollar-denominated Eurobond/Sukuks would be important, he added.

The governor said in addition to the risks identified above, ongoing political impasse, delay in the finalisation of fourth IMF review, and the current heavy rains and floods, which have engulfed central and southern Punjab, threaten the nascent recovery in economic activity. The former two would weigh more on the private capital inflows. The latter can potentially disrupt the output and supply chain of the perishable food items, which challenges an otherwise benign inflationary outlook.

While it is going to take some time before the full extent of damages arrive, initial opinions and past experiences suggest that the current floods would damage some khariff crops and may disrupt supply chain temporarily. Besides having implications for economic growth, floods can also create macroeconomic imbalances by putting pressures on fiscal and external sector. Moreover, supply of loanable funds in the credit to private sector market may also be adversely affected, at least initially. Reflecting these apprehensions indeed, there is deterioration in SBP-IBA’s Consumer Confidence Survey of September 2014 as well.

Policy vigilance requires balancing the tradeoffs between ensuring the continuation of macroeconomic stability, especially in the external sector, and assuaging the fallout of potential damages due to floods. Therefore, the Board of Directors, State Bank of Pakistan, has decided to keep the policy rate unchanged at 10 percent.