SBP sees domestic prices under pressure till December

The State Bank of Pakistan expects domestic prices to remain under pressure from July to December 2005. It would, therefore, maintain a tightened monetary policy stance until inflationary pressure eases off, says a monetary policy statement issued by the SBP.
The Central Board of Directors of SBP, which met in Quetta on Thursday under the chairmanship of Governor Dr Ishrat Husain, reviewed the monetary and external developments from January to June 2005.
The statement says that high oil prices, widening trade deficit and rising interest rates in international financial markets would impact inflation in Pakistan. Therefore, the key objective of SBP's policy would be to fight inflation and bring it down to reasonable level during the next six months.
While maintaining stability in exchange rates, says the SBP, "the extent of the interest rate changes will be determined by the magnitude, direction and speed of inflationary pressures."
In other words, interest rates are not likely to be reduced and tight liquidity is to be maintained until consumer price inflation comes below the target of eight percent.
However, the SBP has assured that credit needs to support growth in Small and Medium Enterprises (SMEs) and agriculture sectors would be given priority since these sectors generate most of the employment. At the same time credit required for further expansion of vital industries and BMR initiatives of the private sector would also be met.
The SBP, however, expected the on-going credit boom (with private sector credit off-take rising to a historically high level of almost Rs 400 billion last year) to ease with expected monetary expansion decelerating to 13 percent, from 16.5 percent, because of the prospect of rise of interest rates triggered primarily by rising core inflation.
EXCHANGE RATE: The rupee has depreciated by 3.28 percent against a basket of 15 currencies last year, says the SBP. However, this gain in external competitiveness was not sufficient to neutralise the adverse impact of high domestic inflation, which raised the relative prices by 5.45 percent. Therefore, the external competitiveness showed a meagre loss of two percent during FY05, says the statement.
The SBP is hopeful the net inflows aided by $4 billion home remittances would be sufficient to finance the large trade deficit and the exchange rate would be stable during FY06.
The central bank expects the economy to fare well once again and sustain the growth momentum built last year. Additional credit of Rs 330 billion would be given to the private sector for capacity expansion and BMR and monetary and exchange rate management will support growth initiatives aimed at poverty alleviation.