SBP cuts interest rate by 50 bps to 10%
06 October, 2012
KARACHI: The State Bank of Pakistan (SBP), as expected, has cut its policy rate by 50 basis points to 10 percent from 10.5 percent with effect from October 8, 2012, mainly on consistent easing of inflation, which is currently in single digit.
The decision to cut the policy rate was taken by the central board of directors of the SBP under the chairmanship of SBP Governor Yaseen Anwar on Friday. It is the second consecutive slash in discount rate after 150bps were cut previously in the last monetary policy. The SBP has also decided to implement certain measures to strengthen the liquidity management framework, a statement said.
"A consistent deceleration in inflation since May 2012, to 8.8 percent in September 2012 is more than earlier estimates. Thus, despite an expected uptick in H2-FY13, the overall inflation outlook has improved. In fact, the likelihood of meeting the 9.5 percent inflation target for FY13 has increased," the Monetary Policy statement said.
At the macro level, it seems that the effect on inflation of falling private investment demand is becoming more pronounced than the influence of high fiscal borrowings. "The disaggregate CPI inflation data also shows that this could be a beginning of a broad-based trend. The number of commodities with double digit year-on-year inflation has slightly come down in the last few months after a slow increase over the last three years; first in the food group and now in the non-food group as well."
The decline in 20 percent trimmed core inflation measure to 10.4 percent in September 2012 is slower than the fall in CPI inflation. "This indicates persistence of inflation expectations due to inertial effect of high inflation experienced in the recent past, overall rising trend in fiscal borrowings from the SBP, and depreciation of exchange rate," the Monetary Policy said.
It notes that the recent fall in inflation together with a retirement of Rs 412 billion of fiscal borrowings from SBP during Q1-FY13 could bring down core inflation further by having a beneficial impact on inflation expectations. This would depend, however, on the fiscal authority's resolve to maintain this trend in the coming quarters, the statement said.
While discussing the previous rate cut announced in August 2012, the Monetary Policy explains that declining inflation together with weak growth in credit to private businesses was the basic context in which the SBP reduced its policy rate by 150 bps in August 2012.
"The resumption of monetary easing, in this environment, was deemed necessary to influence the behaviour of borrowers in the private sector and scheduled banks to step up efforts to improve their intermediary role," states the Monetary Policy. It adds that a host of factors needs to be considered for this to be sufficiently effective.