KARACHI: The State Bank of Pakistan (SBP) on Friday increased the policy rate (interest rate) to 6%. The central bank had kept the policy rate unchanged at 5.75% since May 21, 2016. Four key factors of Pakistan’s economy have witnessed important changes since November 2017 and they affected the policy rate decision. Firstly, PKR has depreciated by around 5 percent. Secondly, oil prices are hovering near $70 per barrel. Thirdly, a number of central banks have started to adjust their policy rates upwards adversely affecting PKR interest-rate differentials vis-à-vis their currencies. Fourthly, multiple indicators show that the output gap has significantly narrowed indicating a buildup of demand pressures, said SBP Governor Tariq Bajwa, while addressing a news conference at SBP head office. “Based on these developments, MPC is of the view that in order to preempt overheating of the economy and inflation breaching its target rate, this is the right time to make a policy decision that would balance growth and stability in the medium to long term. Accordingly, the Monetary Policy Committee has decided to raise the policy rate by 25 bps to 6.00 percent,” he added. Bajwa said that Pakistan’s economic growth was on track to achieve its highest level in the last 11 years. Average headline inflation remains within the forecast range of SBP, but core inflation has continued to increase. Fiscal deficit for H1-FY18 is expected to fall close to the last year’s 2.5 percent. There has been visible improvement in export growth and remittances are marginally higher. However, largely due to high level of imports the current account deficit remains under pressure. The exchange rate adjustment in December 2017 is expected to help ease the pressure on the external front, he added. “The progress in the real sector indicates that agriculture sector is set to perform better for the second year in a row. Production of all major Kharif crops, except maize, has surpassed the level of FY17. Similarly, large scale manufacturing (LSM) recorded a healthy broad-based growth of 7.2 percent during Jul-Nov FY18 as compared to 3.2 percent during the same period last year. While there could be some deceleration in LSM growth due to sector specific issues such as sugar, POL and fertilizer, overall industrial activity is likely to remain strong,” Bajwa said. “Benefiting from both infrastructure and CPEC related investments, construction and its allied industries are expected to maintain their higher growth momentum. After incorporating the impact of commodity sector dynamics on the services sector, the real GDP growth is projected to be around 5.8 percent, significantly higher than FY17, but marginally lower than the annual target of 6 percent for FY18. This is largely due to expectations of a below-target wheat crop because of a reduction in area under cultivation.” He informed that the average headline inflation for H1-FY18 stood at 3.8 percent. Meanwhile, core inflation (non-food-non-energy) continued to maintain its higher trajectory, and clocked in at 5.5 percent during the first half of the year as compared to 4.9 percent last year. “This together with a lagged impact of PKR depreciation and rising international oil prices are likely to increase inflation in the coming months. Taking into account the impact of all these developments, while the average inflation for FY18 is still projected to fall in the range of 4.5 to 5.5 percent, end of fiscal year YoY inflation is likely to inch towards the annual target of 6 percent,” he said. Published in Daily Times, January 27th 2018.