News
Sunday, October 09, 2011
SBP cuts policy rate by 150bps to 12%* Bank says policy rate reduced over declining inflation, high probability of meeting FY12 inflation target * Largest decrease in policy rate since July 2003
Staff Report
KARACHI: The State Bank of Pakistan (SBP) has decided to reduce its policy rate by 150 basis points to 12 percent, the largest decrease since July 2003.
This decision was taken at a meeting of the Central Board of Directors of SBP held under the chairmanship of central bank’s Acting Governor Yaseen Anwar on Saturday. The SBP will continue to monitor developments in the fiscal sector and those pertaining to foreign financial inflows to gauge risks for macroeconomic stability. The year-on-year inflation in September 2011 has come down to 10.5 percent from 13.3 percent in June 2011 though month-on-month inflation is still more than 1 percent on average.
Taking some comfort from declining inflation and high probability of meeting the 2011-12 inflation target together with a need to support private sector credit and investment growth, the Central Board of Directors of SBP, after due deliberations, decided to reduce its policy rate by 150 bps to 12 percent with effect from October 10, the SBP said in its Monetary Policy Decision.
It further said that the main factors contributing in SBP’s decision to reduce its policy rate by 50 basis points in July 2011 continue to show positive progress. There is a decline in CPI inflation and government borrowing from SBP is lower than its end-June level. Led by consistent inflow of workers’ remittances the external current account position is comfortable though there has been some decline in SBP’s foreign exchange reserves. Importantly, concerns regarding weak private sector credit growth and falling real private investment expenditures remain along with a likelihood of rise in real interest rates.
The Monetary Policy Decision, however, noted that at the same time, risks to macroeconomic stability emanating from fiscal weaknesses and falling foreign financial inflows have not receded. Moreover, severe energy crisis and precarious law and order conditions continue to render domestic economic environment least conducive for productive activities. In addition, the likelihood of falling short of the annual GDP growth target has increased due to damaging impact of recent flood in Sindh.
It goes on to say that the rapidly deteriorating global economic conditions, especially in Pakistan’s export-destination countries, do not provide much confidence either. In these circumstances, the policy decision notes, balancing inflation and growth considerations through monetary policy alone is difficult. The year-on-year inflation in September 2011 has come down to 10.5 percent from 13.3 percent in June 2011 though month-on-month inflation is still more than 1 percent on average.
An expected seasonal rise in inflation in the first month of a new fiscal year, the Ramazan seasonality of food prices, and the unexpected effect of flood on inflation have all coincided in the months of Q1-FY12. Thus, isolating temporary changes from underlying inflationary pressures is more demanding at this point in time though the probability of meeting the 12 percent average CPI inflation target for FY12 remains high, the SBP Monitory Policy Decision said.
It said that there were upside risks, however, in meeting the medium-term inflation targets of 9.5 percent in FY13 and 8 percent in FY14. These risks largely stem from persistence of government borrowing from scheduled banks, exchange rate depreciation, and likely upward adjustments in the administered prices of energy.
Courtesy www.dailytimes.com.pk