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The central bank announced a new target for the overnight repo rate at 50 basis points or half a percentage point below the benchmark to better manage liquidity in the interbank market as part of the IMF loan programme. Photo: Bloomberg
The central bank announced a new target for the overnight repo rate at 50 basis points or half a percentage point below the benchmark to better manage liquidity in the interbank market as part of the IMF loan programme. Photo: Bloomberg

Pakistan unexpectedly cuts benchmark rate to 42-year low

The State Bank of Pakistan lowered the discount rate for a fourth straight meeting to 7% from 8%

Karachi: Pakistan’s central bank unexpectedly cut its benchmark interest rate to the lowest in 42 years in an attempt to spur economic growth as inflation slows in the sixth-most populous nation.

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

Inflation in South Asia’s second-largest economy 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.

“They are maintaining the nation’s upward growth strategy" with this cut, Saad Khan, an economist with Karachi- based brokerage Arif Habib Ltd, said by phone. “This is super good news and will help equities rally."

Pakistan’s benchmark stock index is the third-best performer in the world since 2009, according to data compiled by Bloomberg. Textile shipments make up almost half of the exports in the fourth-largest cotton and rice producer.

Target rate

The central bank announced a new target for the overnight repo rate at 50 basis points or half a percentage point below the benchmark to better manage liquidity in the interbank market as part of the IMF loan programme.

The new rate is part of a band where the benchmark is the ceiling and repo is the floor. The floor rate has been set at 5% after reducing the band by 50 basis points, according to a bank statement on the website.

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

The country is still making “significant progress" in meeting targets under a $6.6 billion loan program and the next tranche of $506 million may be released by mid-June, IMF Pakistan mission chief Harald Finger said this month.

The latest rate reduction will probably be the last for several months as a rebound in oil costs will spark price pressures, economists said.

‘Inflationary pressures’

“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, said before the announcement. “With global oil prices rising, I predict the government now will be faced with inflationary pressures that may force the central bank to hold rates."

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

Standard & Poor’s and Moody’s Investors Service have raised their outlooks on Pakistan’s credit rating to positive from stable since March. The firms cited Pakistan’s improving financial position and growth prospects as Prime Minister Nawaz Sharif sells state assets and courts Chinese investment to help narrow the budget deficit. Bloomberg

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