Excerpt from the statement by the State Bank of Pakistan:
Real returns on rupee denominated assets have marginally increased due to a substantial decline in inflation. Moreover, led by a depreciation of 5.2 percent in the Nominal Effective Exchange Rate (NEER), the Real Effective Exchange Rate (REER) has also depreciated by 4.2 percent during July – February, FY13. This bodes well for the competitiveness of the external trade sector. However, real cost of borrowing has increased, which may be undesirable in the wake of declining private investment and low growth in the economy.
Despite continued energy shortages and substantial fiscal borrowings from the banking system, credit extended to private businesses has shown some nascent recovery. During July – February, FY13, loans to private businesses have increased by Rs173.3 billion as opposed to Rs56.8 billion during the same period of last year. This has helped in a modest growth of 2.9 percent in the Large Scale Manufacturing (LSM) sector during July – February, FY13 compared to 1.9 percent in the corresponding period of last year.
A cumulative decline of 450 basis points in the policy rate of SBP since the beginning of FY12 has played a role in this uptick. Moreover, an analysis of the balance sheets of the main sectors supports this assessment. Thus, both the decline in inflation and the need to encourage further borrowings by the private sector point towards continuation of current monetary policy stance and a possible reduction in the policy rate. However, the current balance of payments position and a structural imbalance in fiscal accounts suggest vigilance.
In conclusion, given the risks to the balance of payments position, the Central Board of Directors of SBP has decided to keep the policy rate unchanged at 9.5 percent.