May 24 , 2015
News
SBP cuts interest rate to 7%; lowest in 42 years
* GDP grows by 4.2%, slightly higher than 4.0 percent of last year’s
By Muhammad YasirKARACHI: The State Bank of Pakistan (SBP) on Saturday slashed the discount rate by another 100 basis points to fix it at 7% for a period of two months.
Earlier, the central bank made a cut of 100 basis points in January this year followed by another reduction of 50 basis points in March, in order to spur economic growth against a backdrop of slowing inflation in the country.
The board of directors of the bank believed that macroeconomic situation was moving in positive direction with improvement in current account deficit as well as foreign inflows and containment in inflation.
SBP Governor Ashraf Mehmood Wathra told a press conference that the new ‘SBP target rate’ had been set at 50 basis points below the ceiling rate. He said that the bank would ensure that the overnight rate remained close to this target rate, which would now be called as ‘Policy Rate’.
He said the width of the interest rate corridor had been reduced by 50 basis points from 250 to 200 basis points, adding this was the lowest interest rate announced by the SBP in last 42 years.
“Consequently, the floor rate is set at 5 per cent,” he said. This measure will promote large scale manufacturing (LSM) sector and further boost the economic growth, he added.
Later, an SBP statement about the decisions of the board of directors said the macroeconomic conditions towards the end of current financial year had further improved compared to its beginning. The current account deficit had narrowed down; average annual inflation was significantly below the target; there was a marginal uptick in real GDP growth; and foreign exchange reserve build-up continued, it said.
The current macroeconomic stability achieved through domestic policies and favorable external developments provides an opportunity to focus on reforms that will put the economy on sustainable growth path. All these developments are reflected in the recent upgrades in outlook by international rating agencies that have further improved investors’ confidence.
With contraction in imports, led by sharp decline in oil prices and strong growth in remittances, the external current account deficit at $1.4 billion during Jul-Apr FY15 is around half of the deficit recorded in the corresponding period of the last year. The improvement has overshadowed lower surplus in capital and financial account, especially weak foreign private investment.
Overall, this has supported the reserve building efforts with net SBP reserves rising from $9.1 billion as of 30th June 2014 to $12.5 billion as of 15th May 2015. They are expected to increase further due to subdued outlook of international oil prices, successful continuation of IMF programme, and realisation of expected official foreign inflows. Increase in foreign private inflows can further strengthen this outlook and sustain stability in the foreign exchange market, the board stated. The inflation continues with its downward trajectory in this fiscal year. The year-on-year CPI inflation has declined to 2.1 percent in April 2015 from 8.2 percent in June 2014. The decline in inflation during the current fiscal year has been broad-based as all measures of inflation have recorded deceleration. Soft international commodity prices, stability in exchange rate, contained government borrowings from SBP, moderate aggregate demand and SBP’s earlier conservative monetary policy stance have remained the key factors in controlling inflation this year. Going forward, continuation of inflation at lower levels is reflected in the latest IBA-SBP survey of May 2015 that reports subdued inflation expectations. However, uncertainty about international oil prices and possible adjustment in domestic energy prices are the main risks to this inflation outlook. Credit growth during Jul-Mar FY15 has remained well diversified in terms of coverage and type of finance. All three sectors of the economy – agriculture, manufacturing and services – availed credit both for working capital and for fixed investment purposes. The highlight remains the loans to private sector businesses in fixed investment category that increased to Rs84.4 billion in Jul-Mar FY15 from Rs50.3 billion in the same period of last year. However, owing largely to decrease in commodity prices, loans in the working capital category dropped to Rs90.3 billion in Jul-Mar FY15 from Rs223.8 billion in the same period of FY14.
Courtesy www.dailytimes.com.pk