SBP cuts policy rate by 50 bps to 12.5 pc

KARACHI: Pakistan’s central bank cut on Tuesday its key policy rate by 50 basis points to 12.5 per cent for December and January to spur economic growth, but it remained cautious because of the country’s security situation.

‘Striking a balance between monetary and financial stability and real economic activity has become increasingly difficult,’ the State Bank of Pakistan said in a statement.

The bank cut the key policy rate as inflation eased to a 22-month low of 8.9 per cent year-on-year in October, and as various macroeconomic indicators showed improvements.

However, the central bank said it did not cut the rate by more as it maintained a cautious approach.

‘A close inspection of these encouraging developments together with a pragmatic assessment of prevailing security situation in the country and fiscal uncertainties invite caution and further analysis,’ the bank said in a statement.

Economic growth fell to 2 per cent in 2008/09, its slowest in eight years.

Pakistan pledged to keep its fiscal deficit at 4.9 per cent of gross domestic product in the 2009/10 fiscal year under a deal with the International Monetary Fund.

‘A higher than projected fiscal deficit for FY09 has also changed some underlying assumptions for inflation outlook for FY10,’ the bank said.

The Finance Ministry has yet to report figures for the first quarter of this fiscal year but analysts expect the deficit to overshoot the target by 0.3 per cent.

The central bank also said the security situation also a cause for concern.

The army is attacking militants in northwestern strongholds. The militants have responded with bombs in towns and cities.

Analysts said a 50 basis points cut in the policy rate was expected.

‘The cut was in line with expectations but it seems that this will be the last change for the current fiscal year,’ said Asif Qureshi, director at Invisor Securities Ltd.

Pakistan agreed to a $7.6 billion IMF loan over two years in November last year. The IMF increased the loan by $3.2 billion in July.

More than $5 billion has been released.

The State Bank of Pakistan kept its rate unchanged at 13 per cent on Sept. 29 after a cut in August of 100 basis points.— Reuters