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Pakistan Economy: State Bank Increases Policy Rate by 25 basis points

• The State Bank of Pakistan (SBP) in its Monetary Policy meeting held earlier today announced an increase of 25 basis points in its Policy Rate to 10.25% (6-year high), taking cumulative hikes since Jan 2018 to 450bps. This was above market expectations. In a poll of 30 respondents by Bloomberg, 25 respondents expected status quo, 4 expected a hike of 50 basis points while 1 expected 100 basis points hike.
• The above is a signal by the central bank that the macroeconomic situation of the country remains constrained. Nonetheless, this increase is much lower than the 150 basis points increase in previous monetary policy meeting in November 2018.
• The primary reasons for rate hike mentioned during SBP Governor’s press conference were 1) persisting inflationary pressures, 2) worsening fiscal situation and 3) continuing current account pressures.
• During the press conference, the SBP governor stated that SBP expected Current Account Deficit (CAD) for FY19 to be in the range of US$13-14bn while foreign exchange reserves currently are close to US$8.2bn. To note, we have received US$2bn in last week from friendly countries (total of US$4bn since the start of the newly elected govt. in July 2018).
• The governor also stated that rupee devaluation is a permanent solution of reducing CAD because overvalued rupee makes our exports expensive and imports cheaper. Furthermore, as per the governor, the financing needs of FY19 have been plugged through loans from friendly countries as well as other commercial loans.