SBP cuts key interest rate by 50 basis points to 8pc

KARACHI: The central bank made a 50 basis-point cut in its key discount rate on Saturday, saying plummeting global oil prices had eased inflation while economic growth was rebounding.
“The Central Board of Directors has decided to reduce the SBP policy rate by 50 basis points from 8.5 percent to 8.0 percent effective from March 24, 2015,” the State Bank of Pakistan said in a monetary policy statement.
Saturday move brought the policy rate to the lowest since April 2005 and was the third consecutive trimming in the interest rate during the current fiscal year. Since November 2014, the discount rate has been reduced by 200 basis points following low inflation and positive outlook on external sector.
The statement said headline consumer price index inflation (CPI) continues to follow a downward trajectory and is expected to be well below the annual target of 8.0 percent. The central bank now sees inflation to clock in at 4 to 5 percent during the current fiscal year of 2015.
“As per the recent trend, moderation in inflation is broad-based with food and non-food inflations receding, both the measures of core inflation, non-food non-energy and trim-mean, are also recording decline,” it said.
Key economic indicators — from inflation to foreign exchange reserves to workers’ remittances — showed improvement in the first eight months of the current fiscal year and analysts said another cut in discount rate also depicts central bank’s intentions to encourage banks to lend and companies to borrow.
The headline monthly inflation, measured by the consumer price index (CPI), was recorded at 3.24 percent in February 2015 compared to 3.88 percent in the previous month and 7.99 percent in February 2014.
“However, due to current decline in inflation in general and commodity prices in particular, there could be an increase in aggregate demand, which may have inflationary repercussions beyond FY15,” the statement said.
It added that the growth is on course to surpass the last fiscal year’s FY14 outcome of 4.1 percent. The International Monetary Fund also forecasts the real GDP growth to reach 4.3 percent in FY15.
“After growing by 2.2 percent in July-January FY15, large-scale manufacturing is likely to gain traction due to recent cut in policy rate and low prices of raw materials that could boost the manufacturing sector,” the statement said. “In the agriculture sector, improved outcomes in major kharif crops (cotton and rice, in particular) and incentives in place along with favorable weather conditions for rabi season wheat crop, GDP growth is expected to be higher than that of FY14.”
The central bank said external sector outlook continues to improve on back of foreign exchange inflows and lower oil price despite subdued exports performance.
“Government’s efforts to contain the fiscal deficit have been on track in the first half of FY15, despite slightly slower growth in revenue collection,” it added. “With strong workers’ remittances and declining import growth, current account deficit has shrunk in Jul-Feb period of FY15 as compared to same period last year.”
The bank said nonetheless, with lower price impact in imports and multilateral inflows on track, the external sector outlook remains stable. “This is most visible in the stability in foreign exchange market and in an upward trajectory in foreign exchange reserves.”
It said during July-February FY15 period, net domestic assets decreased and net foreign assets increased, which is a welcome development in contrast to the trends in the same period last year.
“The year-on-year growth in broad money (M2) by February 27, 2015 was 11.5 percent; lower than the average growth of 13.6 percent in the past five years,” it added. “This deceleration is largely due to contraction in net domestic assets of the banking system.”
Growth in credit to private sector during July-February FY15 has also remained subdued at Rs158.9 billion compared to Rs298.3 billion in the same period of FY14.