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SBP cuts interest rate as economy improves

21 April, 2009

KARACHI: Governor State Bank Syed Saleem Raza announcing Monetary Policy during a press conference at State Bank of Pakistan. APP
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KARACHI: Encouraged by declining inflation, the State Bank of Pakistan (SBP) on Monday announced cut in its policy rate by 100 basis points (bps) to 14 per cent but did not say if this will encourage commercial banks to lower their lending rates.

Announcing here the monetary policy for the last (April-June) quarter of the fiscal year 2008-09, SBP Governor Salim Raza said competition among banks alone leads to decrease in their interest rates, something which industrialists have wanted to happen.

He said the inter-bank lending rate is already below that at which the SBP lent to other banks even before the announcement of the new monetary policy. “There is plenty of liquidity available in the banking system and competition can come only through development of secondary markets (for financial instruments).” The new monetary policy comes into effect from Tuesday (today).

Businessmen have been calling for cut in the SBP’s policy rate to support falling industrial output already hampered by incessant power breakdowns and deteriorating security situation. Raza said the central bank has cut the policy rate in expectation of continuous decline in inflation to 14 per cent between April-June 2009 and further to eight per cent next fiscal year. Year-on-year consumer price index inflation came down to 19.1 pc in March from high of 25.3 pc last October.

The situation, he said, which pushed the SBP to increase discount rate has improved especially with government prudently controlling its expenditure. “Fiscal deficit at 1.9 per cent of projected GDP for the first half of the fiscal 2009 and governmentís commitment to cap it at 4.3 pc for entire year is a very significant improvement over last year’s 7.4 per cent.”

It has also projected the current account deficit to shrink to 5.5 pc of full year GDP against 8.4 pc recorded in fiscal 2008. In its second quarterly economic review, the SBP has projected GDP to remain between 2.5-3.5 pc this year.

Government borrowing from the central bank, one of the reasons which fuelled inflation, is also well within the targets set under the Stand-by Arrangement with the IMF, the SBP governor said.

Importantly, he also projected that SBP’s foreign exchange reserves will rise to $ 9.1 billion by close of the fiscal year in June. Reserves held by the SBP in the week that ended on April 11 totalled $ 7.86 billion.

He cautioned the government that slowdown in economic activity exacerbated by energy shortfall, declining demand and tight monetary policy will make it difficult to meet the revenue collection target.

“Against a target of Rs 1300 billion in the fiscal 2009, the FBR has collected Rs 810 billion during the first nine months,” he said, adding: “This means that Rs 490 billion or Rs 163 billion per month needs to be collected in the remaining three months, which may be difficult.”

The central bank had increased its policy rate by 200 bps to 15 per cent last November in a bid to counter runaway inflation. That was the time when the government had to subscribe to IMF loan package of $ 7.6 billion to avert a balance of payments crisis.

AFP adds: The central bank lowered the benchmark interest rate by one percentage point, acknowledging that the economy was showing resilience.

After the 100-basis-point decrease, the interest rate on money lent by the central bank to commercial or depository banks stands at 14 per cent, said the governor of the State Bank of Pakistan. “Now our economic indicators are showing improvement and overall the economy has shown resilience. That has led to the decrease in the interest rate,” Raza told reporters. “The country’s economy has made steady progress on its path towards macroeconomic stability,” he said.


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