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Pakistan Cuts Benchmark Rate to 42-Year Low

Pakistan Cuts Benchmark Rate to 42-Year LowPakistan Cuts Benchmark Rate to 42-Year Low

Pakistan’s central bank cut its benchmark interest rate to the lowest in 42 years in an attempt to spur economic growth amid slowing inflation.

The State Bank of Pakistan lowered the discount rate for a fourth straight meeting to 7 percent from 8 percent, central bank Governor Ashraf Mahmood Wathra said Saturday at a press conference in Islamabad. That’s the lowest since August 1973. Fourteen of 15 economists in a Bloomberg survey had predicted a cut to 7.5 percent and one saw a reduction to 7 percent.

Inflation has eased each month this year as transport and food prices fell, giving the central bank room to boost growth that the International Monetary Fund predicts will be slower than previously forecast. The latest rate reduction will probably be the last for several months as a rebound in oil costs will spark price pressures, economists said.

“The decision has been taken to spur private-sector borrowing and encourage business activity,” Adeel Ahmed Khan, chief executive officer at BMA Asset Management Co. in Karachi, which manages about $80 million, said before the announcement.

Inflation will average about 4.2 percent in 2015 before accelerating to 5.4 percent in 2016, according to a Bloomberg survey published in April. Consumer prices rose 2.11 percent in April, the slowest rate in Bloomberg data going back to 2009.

The central bank aims to keep real interest rates – the discount rate minus the inflation rate – at about 200 basis points or 2 percentage points, although it doesn’t have a formal target.

Saturday’s decision came after the IMF this month scaled back Pakistan’s growth forecast for the year through June 30 to 4.1 percent from 4.3 percent and 4.5 percent from 4.7 percent for the following 12 months.

 

Financialtribune.com