Excerpts from the statement by the State Bank of Pakistan:
The post July monetary policy decision period continued to witness stable macroeconomic conditions. This was most visible in the headline variable of inflation that declined to 7.0 percent YoY in August 2014, which is its lowest level since June 2013. Moreover, after recording an improved 4.1 percent growth rate in FY14, real economic activity is expected to continue in FY15. The other highlight of this stability is the gains on fiscal liberalization: shrinking budget deficits, contained government borrowings, and improved debt profile.
In addition to the risks identified above, ongoing political impasse, delay in the finalization of fourth IMF review, and the current heavy rains and floods, which have engulfed central and southern Punjab, threaten the nascent recovery in economic activity. The former two would weigh more on the private capital inflows. The latter can potentially disrupt the output and supply chain of the perishable food items, which challenges an otherwise benign inflationary outlook. While it is going to take some time before the full extent of damages arrive, initial opinions and past experiences suggest that the current floods would damage some khariff crops and may disrupt supply chain temporarily. Besides having implications for economic growth, floods can also create macroeconomic imbalances by putting pressures on fiscal and external sector. Moreover, supply of loanable funds in the credit to private sector market may also be adversely affected, at least initially. Reflecting these apprehensions indeed, there is deterioration in SBP-IBA’s Consumer Confidence Survey of September 2014 as well.
Policy vigilance requires balancing the tradeoffs between ensuring the continuation of macroeconomic stability, especially in the external sector, and assuaging the fallout of potential damages due to floods. Therefore, the Board of Directors, State Bank of Pakistan, has decided to keep the policy rate unchanged at 10 percent.