State Bank of Pakistan keeps the Discount Rate Unchanged.

Following the interest rates set by the central bank of a country is one of the most important tasks of an analyst as it impacts lot of other factors influencing the economy. All the analysts were foreseeing an interest cut, except one; the analyst at JS was expecting 50-100 basis points cut. He was expecting SBP to keep the interest rate unchanged.

Let me brief you on the monetary policy. In a widely expected move, State Bank of Pakistan (SBP) kept its benchmark interest rate unchanged at 12.5% in its monetary policy for the next two months (Feb-Mar) of FY10.

Though keeping discount rate cuts on hold for now due to expected escalation in cost push inflation over the next few months and uncertainty on materialization of FoDP assistance, SBP maintained a positive tone in the monetary policy. This was owing to the following:

a) Improvements witnessed in agriculture sector

b) Constant recovery in Large-scale Manufacturing (0.7% MoM growth in Nov-09)

c) Pick up in private sector credit (supported from substantial improvement in total banking system deposits).

d) Declining external current account deficit (USD2bn during 1HFY10) due to decline in international commodity prices and sustained flow of remittances.

e) Improving balance of payments position (+USD1.4bn during 1HFY10).

Going forward, SBP cites delay in foreign inflows from FoDP, strained liquidity and delay in passing over, increasing in international commodity prices as major challenges to domestic economy. This is owing to the increase in government borrowings, continued flow of credit of Public Sector Enterprises, lingering inter-agency circulatory debt and the slowdown in NFA accumulation.

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