The State Bank of Pakistan (SBP) made no change to the policy rate in March after it announced on Saturday that the 5.75 per cent rate has been maintained.
Inflation expectations due to a lack of supply-side pressure were cited as the primary reasons the bank decided to keep its policy rate unchanged, according to the statement released by the central bank.
At the same time rising real incomes in the current low-interest rate environment have encouraged an increase in consumption, leading the SBP to forecast a rise in the inflation rate as domestic demand picks up.
The central bank noted that real economic activity continues to gather pace, owing mostly to better agricultural output, increase in key large-scale manufacturing sectors, and a healthy uptick in credit to the private sector.
“This expansion is helped by a range of factors, including low cost of inputs, upbeat economic sentiment, improved energy supplies and CPEC related investments,” SBP said in its statement. “As a result, GDP growth is expected to further improve in FY17.”
The central bank said private sector credit increased by Rs349 billion in Jul-Feb of fiscal ’17, compared to Rs267 billion in the same period last year.
Similarly, the low-interest rate environment led to an increase in private sector business loans, which were higher by Rs159 billion in July-Feb fiscal ’17, as compared to the same period last year, when the figure stood at Rs102 billion.
The SBP also noted that the expansion in economic activity has significantly contributed to an increase in imports, which has pushed the current account deficit to $5.5 billion during the same period.
The State Bank further pointed out that while net financial flows remained higher, they were insufficient for financing the current account deficit.