State Bank likely to keep rates unchanged

[Naveed Yaseen]

KARACHI: Pakistan’s central bank is likely to keep interest rates on hold for the next two months to the end of November on policymakers’ fears of rising inflation and fiscal slippages, economists said on Monday.

The State Bank of Pakistan is due to announce its monetary policy for the next two months on Tuesday. It cut the policy rate by 1 percentage point to 13 percent in August.

“With the fiscal framework unravelling, keeping rates on hold would be the right thing to do at this point,” said Sayem Ali, an economist at Standard Chartered Bank.

Pakistan’s budget deficit for the 2008-09 fiscal year to the end of June was 5.2 percent of gross domestic product, higher than a government target of 4.3 percent of GDP.

Economists fear there may be further slippages because of government borrowing and also because there is no indication of when pledges of aid from Pakistan’s allies would come through.

Donors pledged $5.7 billion in aid at a conference in Tokyo in April but only a fraction of that has trickled in.

“With no immediate disbursement of Tokyo pledges, we believe the appetite for government borrowing will continue to put pressure on market interest rates and hence liquidity,” said Muzzamil Aslam, economist at JS Global Capital Ltd.

Pakistan’s allies met in New York last week in a show of support but the timing of aid flows is unclear.

The country’s finances have been propped up since last November by a $7.6 billion loan from the International Monetary Fund over two years and the IMF increased the loan by $3.2 billion in July.

The IMF said this month interest rates were at the right level for inflation, but could come down further “if economic and financial conditions permit.”

Inflation had eased from record levels set last year but fears remain of commodity prices rising again, economists said.

Annual consumer price inflation slowed to 10.69 percent in August, its slowest in 20 months, though with higher food and fuel prices, upward inflationary pressures are likely to build again.

“The fiscal stance of the government seems more expansionary than what is mandated under the IMF programme and this increases the risk to the inflation outlook,” said Asif Qureshi, director at Invisor Securities Ltd.

“Although nominal interest rates in Pakistan are still fairly high, the central bank may adopt a more measured approach towards easing because of fiscal and inflation considerations,” Qureshi said. reuters

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