KARACHI: State Bank of Pakistan (SBP) has decided to keep the policy rate unchanged at ten percent. SBP Governor, Yaseen Anwar announced this while unveiling the Monetary Policy Statement (MPS) at a press conference here on Friday afternoon.

The decision was taken at a meeting of the Central Board of Directors of SBP held under chairmanship of the Governor here today.

According to the policy statement, the SBP increased the policy rate by 50 basis points (bps) each in September and November 2013 mainly on account of two concerns. One was the continued deterioration in the balance of payments position while the other was worsening of inflation outlook.

The fundamental weakness in the balance of payments position is persistent contraction in net financial flows since fiscal year 2008. Substantial repayments of IMF loans during the last two and a half years have only increased the pressure.

There is no room for complacency and considerable effort is required to bring a sustainable improvement in the outlook of external accounts.

The CPI inflation has increased during first half of FY 14.

The important point is that the risk of demand-driven inflation is still rather moderate. The international commodity prices have also either remained stable or declined since the beginning of FY14. This has neutralized to some extent the direct impact of exchange rate volatility on CPI inflation.

Taking into account these factors, SBP has accordingly revised its inflation projection downward.

The statement said the SBP linked the minimum rate of return on average balances held in saving deposits with the floor of the interest rate corridor.

This policy intervention ensures that deposit rates respond more strongly to policy rate changes.

The statement said the quarterly flow of fiscal borrowings from the SBP has remained positive in both quarters of H1-FY14. This does not bode well for the effectiveness of monetary policy.

The SBP expects that the government will keep these borrowings in check in H2-FY14 and lower outstanding stock gradually as stipulated in the new International Monetary Fund (IMF) program. According to the statement, a risk to the fiscal position is a possible shortfall in tax revenues, recurrence of energy sector circular debt, and delays in budgeted foreign inflows.

Such deviations could lead to increase in borrowings from the banking system, further accumulation of domestic debt and higher-inflation. Although there are some risks to the balance of payments position due to uncertainty surrounding expected foreign inflows, expected increase in inflation is slightly lower than anticipated earlier. In view of the above, the Board of Directors of SBP has decided to keep the policy rate unchanged at 10 percent, State Bank's policy statement said.

To a question, the Governor said the Central Bank enjoyed independence and free-hand so far its Monetary Policy is concerned. To another query, he said the Currency Swap Agreement/Line with China has proved very helpful to Pakistan. Originally, it is for three years. Such an agreement with Turkey is pipeline and this would be good for both the countries, he added.

(APP)