Pakistan's central bank maintained its policy rate at 10.0 percent and said almost all major economic indicators had strengthened in recent months, improving the outlook for inflation to remain within single digits in the current 2014 fiscal year.
The State Bank of Pakistan (SBP), which raised its rate by 100 basis points in 2013, on March 1 forecast inflation in fiscal 2014, which began on July 1, between 10 and 11 percent
Pakistan's inflation rate was practically unchanged at 7.93 percent in February from January's 7.91 percent but down from 9.18 percent in December and 10.9 percent in November, a 2013 high. Inflation last year was affected by a rise in the general sales tax, the imposition of value-added-tax on some manufactured goods and the adjustment of electricity tariffs.
The larger-than-expected decline in consumer prices in the last two months has positively impacted market sentiment and was broadly in line with the SBP's view that a pickup in economic activity reflected improved utilization of idle productive capacity rather than higher demand.
"In other words, growth of 6.8 percent in the LSM sector (Large Scale Manufacturing) is an indicator of aggregate supply, which bodes well for containing inflation," an upbeat SBP said.
In addition to growth in manufacturing, the SBP said the fiscal deficit had been contained in the first half of the 2014 fiscal year, private sector credit has increased, the Pakistani rupee had appreciated and foreign reserves, a key concern of the bank for some time, have increased noticeably.
"All-in-all confidence in the economy to rebound seems to have increased," the SBP said.
In the third calendar quarter of 2013, Pakistan's Gross Domestic Product expanded by an annual 5.0 percent, up from 3.59 percent in the second quarter.
In its latest quarterly report, the SBP forecast economic growth of 3-4 percent for fiscal 2013/14, below the government's target of 4.4 percent but higher than the International Monetary Fund's February forecast of 3.1 percent. In 2012/13 the economy grew by 3.6 percent.
Pakistan's foreign exchange reserves rose to US$ 4.6 billion by March 7 from $3.2 billion at the end of January but the bank said this was only a beginning as a substantial and consistent accumulation is required. Net capital and financial inflows of $428 million in the July to January period were still considerably below the current account deficit of $2.055 billion in the same period.
The Pakistani rupee plunged in 2008 and continued to depreciate slowly in the following five years but after hitting 108.5 to the U.S. dollar on Dec. 4, 2013, it has reversed course and strengthened in the last three months, especially during March.
Earlier today the rupee was trading at 99.31 to the dollar, up 5.3 percent this month alone and 5.7 percent so far this year.
"These trends, including exchange rate appreciation, have improved the inflation outlook with a higher likelihood of average inflation remaining within single digits for FY14," the SBP said.