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Monetary PolicyDecisionNOVEMBER 2014

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Inflation (CPI)

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Inflation (CPI) (cont)

This decline is explained by:

smooth food supplies, which contained the price ofperishable items;

falling administered prices, which incorporate the fall ininternational commodity prices, especially oil;

low inflation expectations, as witnessed by IBA-SBPconsumer confidence surveys;

a significant base effect.

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Inflation (CPI) (cont)

Given its recent downward trend, the likelihood forinflation to end the current fiscal year on a lowerplateau is high. But, there are risks.

First, downward trend over the medium to long termremains to be seen because it is based on volatileprices of perishable items and oil.

Second, other risks identified in the previous statement,

such as cut in subsidy to electricity and levying ofGIDC, still hold and if materialized can alter the inflationoutlook on a higher side.

Third, underlying inflationary pressures on core inflationremain.

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LSM Growth (cont)

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Major Crops

Barring the limited flood-related damage to somekharif crops, agriculture output is expected to

perform better than the previous year especiallynow when incentive for Rabbi season crops hasbeen announced.

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Fiscal Outlook

Government has shown a significant progress incurtailing budgetary imbalances

To achieve fiscal consolidation in the long run,structural reforms to broaden the tax base remain

imperative

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Fiscal Outlook (cont)

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Current Account Position

Low oil price along with falling inflation can improvecompetitiveness of Pakistani exports.

Imports, on the other hand, might take advantageof low global commodity prices

Current slowdown in exports is further challengedby falling international cotton prices and stiffcompetition in low value-added textile products

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Current Account Position (cont)

Thus, trade deficit is expected to remain underpressure and the healthy growth in workers

remittances would continue to assuage theweaknesses in current account deficit, to someextent.

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Foreign Exchange Inflows

It is also important to note the role of foreignexchange inflows in domestic liquidity creation and

helping the banks to extend more credit to theprivate sector

This happens as government gets the space toborrow less from the banks, thereby leaving moreliquidity with the banks for credit expansion.

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Policy Rate

Based on these considerations, the Board ofDirectors, State Bank of Pakistan, has decided to

reduce the policy rate by 50 basis points to 9.5percent with effect from 17 November 2014.