ISLAMABAD: The State Bank of Pakistan on Saturday cut interest rate for the fourth straight time to a 42-year low of 7 percent from 8 percent in a bid to spur economic growth, as inflation in recent months was more muted than expected. “Given the macroeconomic conditions, the Board of Directors have reduced the policy rate by 100 basis points to 7 percent, which is the lowest rate in last 42 years,” Ashraf Mahmood Wathra, governor of the SBP, told a news conference. The policy rate, effective from May 25, is the lowest since August 1973. The SBP sees macroeconomic conditions towards the end of the current fiscal year further improved as compared to the beginning of the year. “The current macroeconomic stability achieved through domestic policies and favourable external developments provide an opportunity to focus on the reforms that will put the economy on sustainable growth path,” Wathra said. He said the reduction in the policy rate will promote the business activities in the country and reduce the input cost. The low inflationary trend allowed the central bank to cut interest rate in successive monetary policy announcements from November 2014 onwards. The SBP projects consumer price index inflation in the range of 4 to 5 percent for the whole year as compared to the original target of 8 percent. The CPI rose 2.1 percent in April from March. The decline in inflation during the current fiscal year has been broad-based as the entire headline and underlying measures of inflation have recorded deceleration, the bank said. That has allowed the central bank to test the boundaries on interest rates, ushering in what some economists predict might be a new era of lower borrowing costs for the country. Wathra said the monetary board also reviewed the interest rate corridor – the band of minimum and maximum interbank rates, cutting the upper ceiling by 1 percent to 7 percent and fixing lower cap at 5 percent by bringing it down from 5.5percent. The governor said the board decided to reduce the width of the corridor to 2 percent from 2.5 percent for ensuring predictability in the money market. “Now the upper ceiling is 7 percent while the floor will be at 5 percent,” he added. Wathra also announced a new target rate, setting it at 0.5 percent lower than the key discount rate. “Although the key interest rate is 7 percent, the SBP will target the 6.5 percent rate and will ensure that the repo rate remains close to the target rate,” the SBP governor said. “These changes were consistent with the SBP plan announced in February and in line with best international practices.” The central bank had shared the plan of reducing the corridor rate with the International Monetary Fund (IMF) and took them into confidence. The governor said after previous reductions in the policy rates, two important developments took place including significant growth in long-term loans and trade financing quantum jump. There were other factors like availability and prices of gas and electricity that also have affects on the industrial growth. Overcoming energy shortages and improving law and order conditions is expected to provide further impetus in reviving investment and higher production. Real GDP is provisionally estimated to have grown by 4.2 percent in the current fiscal year of 2014/15, slightly higher than 4 percent in the last fiscal year, the SBP said in a statement. “Overcoming energy shortages and improving law and order conditions is expected to provide further impetus in reviving investment and higher production,” the statement said. “Gradual realisation of planned investment in energy and infrastructure projects will provide additional boost to growth. Consequently, growth is expected to be revived at a relatively faster pace going forward.” The statement said current account deficit has narrowed down; average annual inflation is significantly below the target; there is a marginal uptick in real GDP growth; and foreign exchange reserve buildup continues. All these developments were reflected in the recent upgrades in outlook by international rating agencies that have further improved investor confidence. With contraction in imports, led by sharp decline in oil prices, and strong growth in remittances, the external current account deficit at $1.4 billion during Jul-Apr FY15 is around half of the deficit recorded in the corresponding period of last year, it added. The reserves are expected to increase further due to subdued outlook of international oil prices, successful continuation of IMF program, and realisation of expected official foreign inflows. Increase in foreign private inflows can further strengthen this outlook and sustain stability in the foreign exchange market.
