CB keeps policy rates unchanged betting on short-lived COVID-19 outbreak

• Expects notable recovery in3Q economic activities 
• Expects expansion in private credit following notable gain in Aug.
• Foreign reserves estimated at US$ 6.7bn as at end-Sept.

The Central Bank (CB) kept policy interest rates unchanged at the current levels yesterday with recent pick up in private credit and falling market lending rates while betting on a short-lived COVID-19 outbreak in the country. 
Accordingly, CB’s Monetary Board at its meeting held onWednesday decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) at their current levels of 4.50 percent and 5.50 percent respectively, thereby continuing the prevailing accommodative monetary policy stance. However, CB cautioned that the recently emerged unexpected COVID-19 cluster could have an impact on the country’s economic rebound in the near term.

“The unexpected COVID-19 cluster that has emerged recently could somewhat affect this momentum in the near term, but the expeditious measures that are being taken by the government to contain the spread could limit this impact,” it said.

The CB reiterated that it expects a notable recovery in economic activities in the third quarter of the year following the expected larger contraction of economic activities in the second quarter compared to the first quarter of the year.

The Department of Census and Statistics (DCS) recently pushed back the release of the second quarter GDP estimates to December in order to capture certain economic atcivities during the two-month lockdown period, which fell within the second quarter.

Citing the unemployment data released by DCS for the second quarter, the CB noted that level of employment remained mostly unchanged in the second quarter, indicating a less than expected significant impact on economic activity. 

“As per the DCS, the unemployment rate, which was estimated at 5.7 percent in the first quarter of 2020, has declined to 5.4 percent in the second quarter. The level of employment has also remained broadly unchanged in the second quarter compared to the large decline reported in the first quarter. These suggest that economic activity has remained without much deterioration in the second quarter,” the CB reasoned. 

Meanwhile, the CB expects the expansion of credit to the private sector to continue in the period ahead following the notable expansion in August, despite the recent rise in COVID-19 infections.

In August, the broad money growth also further accelerated driven by private credit and credit to the government and State-owned enterprises.

The CB stressed that external sector remains resilient with improved liquidity in the foreign exchange market, particularly with the settlement of US$1 billion sovereign bond, which matured early this month.

The depreciation of the rupee against the US dollar was contained to 1.5 percent thus far during the year with the exchange rate remaining stable. The CB noted that it would continue to purchase foreign exchange from the domestic market. Further, the CB pointed out that the improvement in earnings from merchandise exports, restrictions imposed on the importation of non-essential goods and low crude oil prices helped narrow the trade deficit substantially while containing the current account deficit so far during the year.

Moreover, it was noted that services exports (excluding the tourism sector) continued to record a healthy growth rate led by computer and logistic services related activities while workers’ remittances continued to record a notable acceleration since June 2020.

The country’s gross official reserves were estimated at US$ 6.7 billion at the end of September, providing an import cover of 4.6 months.

Meanwhile, the CB also believes that the current uptick seen in the National Consumer Price Index (NCPI)-based headline inflation driven by food prices to be temporary. 

“The recent increase in food prices is expected to be short-lived supported by domestic supply side developments as well as the recent reduction in prices of several essential goods. Accordingly, inflation is expected to remain broadly within the desired range of 4-6 percent in the near term and over the medium term with appropriate policy measures,” it stated. The CB stressed it would continue to monitor domestic and global macroeconomic and financial market developments and take further measures appropriately to ensure the economy promptly reverts to a sustained high real GDP growth path, while containing inflation in the 4-6 percent range under its flexible inflation-targeting framework.