State Bank to Issue Monetary Policy

Beginning of article

Syed Salim Raza, Governor State Bank of Pakistan disclosed that the SBP Central Board of Directors has decided that the central bank will issue Monetary Policy Statement on quarterly basis.

Unveiling the Monetary Policy Statement at a press conference held at SBP, Karachi on January 31, 2009, Mr. Raza said that the next monetary policy statement will be issued by the end April 2009.

He said that extent of risks and vulnerabilities, which the economy had faced during 2008, have moderated but we would need to remain watchful of the emerging risks and challenges. He pointed out that factors such as the vulnerability of the external sector due to high oil and other commodity prices; persistence of high imports and weak prospects of foreign investment, have all moderated considerably owing to improvements related to each area.

Mr. Raza said that progress has been made with inflation, over the last four months, but it is very stubborn in the core inflation (i.e. non-food & non-energy). The slow improvement in core inflation, while it has a structural element, is primarily owing to the fact that non fuel and non food items, such as wages and rents and fares etc. continue rising after the supply side shocks recede. This more entrenched trend is because inflationary expectations remain; for the good reason that we have had 12 months of high inflation and several preceding years during which the potential for inflation breaking out in a substantial way was being developed, he added.

He said that by the end of F Y09 there will be some reduction in both the fiscal and external current account deficits relative to FY08. However, not only is the expected magnitude of these deficits high but also there are risks of slippages. "This signifies that the demand pressures have not completely dissipated despite a slowdown in economic activity," he said and added that the high expected average CPI inflation of 20 percent for FY09 (significantly higher than the FY09 target of 11 percent) and its persistence, reflected by core inflation measures, clearly reflect the risk on this front.

"To mitigate the implications of these risks it is important to continue with the current monetary policy stance," he said and added, therefore, the SBP has decided to keep the policy discount rate unchanged at 15 percent.

While elaborating on the more recent liquidity issues, he said that the present pressure on interest rates would have come irrespective of the discount rate as we have seen an unprecedented fall in banking liquidity post June, between July 1 and Jan 10, deposits have shrunk by 3.4%, or Rs 128 billion, while total credit has grown by 11% or Rs 500bn., putting a strain of Rs 628 bn. on the system, or shrinking available liquidity by about 14%. This was the simple counterpart of the CA deficit, and this level of contraction of liquidity would have raised interest rates in and of itself, regardless of where the discount rate was.

Mr. Raza said the State Bank has taken several measures to further strengthen and segregate the responsibilities of debt and monetary management including:

i) Prior announcement of the auction calendar for Treasury Bills (T-bills) and Pakistan Investment Bonds (PIBs) and a volume based approach to determine the auction result. These are positive steps in the development of a liquid government debt market;

ii) Ministry of Finance will henceforth be responsible for deciding the cut off yields of the primary auctions of T-bills and PIBs on the above premise.

He said the State Bank will continue to manage the operational aspect of auctions and there will be no change in the process as far as the market is concerned and added next step in the segregation of debt and monetary …