Pakistan Cuts Benchmark Interest Rate to 9%

The Central Bank of Pakistan cut its key policy rate by 50 basis points to 9 percent on June 21st, in an effort to boost economic growth.
STATE BANK OF PAKISTAN | Duarte Ricardo | 6/21/2013 4:17:12 PM
Extracts from the State Bank of Pakistan Press Release:

There has been a considerable improvement in SBP conducted surveys of consumer confidence, expected economic conditions, and inflation expectations. The absence of foreign financial inflows and high fiscal borrowings from the banking system, however, remain formidable economic challenges, especially for monetary policy. Similarly, power shortages and security conditions continue to be strong impediments to growth.

An almost continuous and broad based deceleration in inflation over the last year has had a favorable impact on inflation outlook. In May 2013, the year-over-year CPI inflation was 5.1 percent while trimmed measure of core inflation was 6.7 percent.

A reflection of the current declining trend in inflation can be seen in the muted real economic activity. The GDP growth has struggled to ameliorate in the last few years. The provisional estimate of GDP growth for FY13 is 3.6 percent, which is lower than the 4.3 percent target for the year.

The external current account deficit is expected to remain manageable, around 1 percent of GDP for FY13, signifying very low risk from this source for the external accounts. The real challenge continues to emanate from the lack of financial inflows.

In this context, a lot depends on the fiscal outlook. The fiscal deficit for FY13 has been estimated to reach 8.8 percent of GDP, which is considerably higher than earlier projections. If the economy is to reap the benefits of evolving positive sentiments and lure the domestic as well as foreign investors then implementation of a reform oriented and credible medium term fiscal outlook is essential.

On its part, the Central Board of Directors of SBP has decided to place a higher weight to declining inflation and low private sector credit relative to risks to the balance of payments position.

Pakistan Cuts Benchmark Interest Rate to 9%