SBP cuts discount rate by 50 basis points

KARACHI: State Bank of Pakistan has reduced the key discount rate from 10.5 percent to 10 percent in the Monetary Policy Statement (MPS) announced on Friday, Geo News reported.

The governor of the central State Bank of Pakistan, Yaseen Anwar, said the new rate would come into effect on Monday, at the start of the new working week.

It comes one day after the International Monetary Fund said that Pakistan's economic situation was worsening and that it faces a return to double-digit inflation as the government prints money to finance its deficit.

In a mission report, the IMF said Islamabad urgently needed to address deep problems in its energy sector, including costly subsidies and poor distribution, while boosting growth to meet a rapidly growing population.

Anwar said the overall outlook for inflation has improved and that the changes of meeting the target rate of 9.5 percent this fiscal year had
increased.

The bank promised to continue encouraging the private sector, but called for improved energy supplies and a reduction in government borrowing.

"The two steps would facilitate an increase in the demand for credit and improve the supply of credit to private sector."

Anwar said weak foreign financial inflows were the main challenge faced by the balance of payment position.

On the basis of the monetary indicators and last monetary policy decision, most of the analysts and economists believed that the State Bank would not announce any significant change in the October-November 2012 policy review.

However, at the same time, the experts were also anticipating a 50 basis points cut in the interest rates by the board of directors of the central bank with a view to enhance the growth of private sector credit off-take, a benchmark to assess the scale of private investment, in the economy.

The State Bank had slashed its benchmark interest rate by 150 basis points to 10.5 percent for August-September amid reviving private sector credit and investment growth.

This was the first discount rate cut since November 2011. Earlier the central bank had placed the discount rate on hold for the fourth consecutive monetary policy review.

Earlier, former caretaker finance minister Dr Salman Shah had said that food inflation and growing fiscal deficit remain major risk for the central bank to maintain price stability, therefore, it is expected that it would keep status quo in the upcoming monetary policy statement.

“If the SBP goes for a cut in the interest rates, then it will be politically-motivated move owing to the election year,” said Dr Shah.

“To boost private sector credit growth, it is necessary for the government to control rising fiscal deficits by curbing expenditures,” he said. Contrary to the SBP anticipation in its last monetary policy statement, the private sector, instead of increasing borrowing, continues to retire loans to the commercial banks.

“Markets remain conscious and the real picture will be clear after the release of inflation numbers for the month of November. I think, if the consumer price index stands below 10 percent, then the SBP may pursue its policy of monetary easing,” said Sayem Ali, an economist at Standard Chartered Bank.

“There is an ease in the currency printing by government to meet its budgetary requirements due to persistent lending by the commercial banks to the government,” said Ali.

“The SBP seems unlikely to continue with the monetary policy easing as the fiscal and the monetary environment will remain challenging,” said Ahsan Mehanti, a senior analyst.

He said that the September CPI inflation is likely to be in the double-digit due to rising energy prices. “We are not seeing austerity measures by the government so, it is very difficult for the SBP to announce downward revision in the interest rates,” said Mehanti. Pakistan’s August CPI inflation stood at 9.1 percent from a year ago.

The government raised Rs37 billion through an auction of PIBs. The highest amount of Rs15 billion was invested in the five-year PIBs at 11.1744 cutoff yield against the yield of 11.5520.

The fresh auction attracted Rs13.5 billion for the PIB of three-year tenure at a cutoff yield of 10.6252 percent, while the 10-year bond received an amount of Rs8.9 billion at 11.5996 percent cutoff yield.