Market hails interest rate cut

KARACHI: The central bank on Saturday surprised the market by cutting the benchmark interest rate by exceptional 100 basis points in a move seen as a signal to a government keen for rate cuts that it is supporting the struggling economy, economists said on Saturday.
The State Bank of Pakistan cut interest rate for the fourth straight time to a 42-year low of 7 percent from 8 percent. The decision was unexpected for most of economists, who predicted a cut to 7.5 percent.
They said the move is designed to increase lending and push up economic growth.
“Though it is encouraging, it is unlikely to have positive impacts on economic revival and growth given the deflationary environment,” said Dr Salman Shah, former finance minister. “The record low slash in interest rates is just a popular notion by the government to gain political support and sympathy.”
Shah said the easing stance is “just a single stimulus to boost real economic activity in the country.”
The government targets 5.1 percent growth in the current fiscal year, while the central bank sees GDP has grown by 4.2 percent during the year. The IMF also scaled back growth forecast for the current fiscal year to 4.1 percent.
Economists said the ongoing monetary easing shows there is “coordination between fiscal and monetary policies, which is a positive sign for the economy.”
However, they said the government seems a major beneficiary of decline in the interest rates, as its interest payments on domestic debt will reduce and lead to re-rolling and re-pricing of the debt.
“The government interest payments on domestic debt will slide by 2 percent with the downward revision in the interest rate,” Dr Ishrat Husain, former governor SBP.
The other important development of the recent monetary policy statement is the central bank is going towards improving interest rate corridor—as per the structural benchmark set by the International Monetary Fund.
In February last, the SBP announced its time-bound plan to improve its interest rate by setting the policy rate between the floor and ceiling rates of the corridor. The central bank will make the improved interest rate corridor operational by end-September 2015.
Husain was optimistic about expansion in private sector credit. “The decline in cost of borrowing will spur private sector lending and motivate households to increase spending,” he added.
Meanwhile, business community also hailed SBP’s decision of trimming the interest rates, as it will bolster economic activities and consequently will create more jobs.
“One percentage point reduction would provide some oxygen to the industrial sector and of course prove to be the savior of dying industrial units,” said Yakoob H Karim, President Lasbela Chamber of Commerce and Industry.