Policy rate maintained at 12% – No change to bring stability – Alfalah Securities Limited

Karachi, June 11, 2012 (PPI-OT): State Bank of Pakistan (SBP) has kept the policy rate unchanged in the Monetary Policy Statement (MPS) announced on 8th June, 2012 inline with Alfalah Securities Limited’s expectations.

According to Alfalah Securities Limited, this measure is taken amid bleak economic outlook of the country where the government’s heavy reliance on borrowings from the banking system to finance fiscal deficit is one of the major concerns which have led to crowding out of private sector credit and has resulted in slackness in economic growth. Moreover, the deteriorating balance of payment situation continues to pose serious threats to the economic stability resulting out of sluggish exports growth, burgeoning import bill and insufficient foreign inflows. The steep Pak Rupee depreciation against US Dollar and double digit inflation has further worsened the economic situation.

A status quo is maintained by SBP although Consumer Price Index (CPI) inflation has remained stubborn in double digits. In May 2012, the country’s CPI took a jump to 12.3% YoY against 11.30% in April 2012, which turned the real rates to negative. However, SBP anticipates inflation to ease off in the next few months due to steep decline in petroleum prices in the international market which led SBP to keep the policy rates stable. The average CPI inflation is recorded at 10.97%YoY and the Core inflation measured by Non-food Non-energy (NFNE) increased by 10.5% in 11MFY12 (Jul-May).

Alfalah Securities Limited believes, an unchanged status of discount rate would not have any negative impact on the stock market as the situation has remained stable. A decline in international commodity prices may result in easing off the import bill and taming inflation however, devaluation of PKR against US Dollar would exert pressure on the economic prosperity. Going forward, there are also concerns relating to the foreign exchange reserves which are likely to come under pressure due to repayment of foreign debt obligation including the IMF (SBA).