The State Bank of Pakistan (SBP) slashed key interest rate to a record low of 7 per cent at the weekend, laying a foundation for implementing growth-oriented economic policies in the country, the country’s media has reported.
“Given Pakistan’s current macroeconomic conditions, the SBP board of directors has decided to reduce the [interest] policy rate by 100 basis points (1 per cent) to 7 per cent, the lowest in 42 years,” announced SBP Governor Ashraf Mahmood Wathra following a meeting of the board. The new rate will be effective from May 25.
This is a fourth cut in the key discount rate since November last year. The cut was prompted by a decline in inflation during the current fiscal year, which the central bank described as ‘broad-based’ in an official statement.
“All headline and underlying measures of inflation recorded deceleration,” the SBP said. The bank initially responded cautiously to the falling inflation rate.
The SBP also projected a subdued inflation rate in the coming months and said uncertainty about international oil prices and possible adjustment in domestic energy prices are the main risks to this inflation outlook.
The central bank lowered its key interest rate at a time when the federal government has decided to implement growth-oriented economic policies from the new fiscal year, beginning from July. Industrialists have long been demanding an interest rate below 8 per cent to reduce their cost of business.
The reduction in the policy rate will promote business activities in the country and reduce the input cost, the SBP governor said. However, he added that other factors, like the availability and prices of gas and electricity, could also affect industrial growth.
“Overcoming energy shortages and improving law and order conditions is expected to provide impetus in reviving investment and higher production,” the SBP said.
The bank gave credit for the current macroeconomic stability to domestic policies and favourable external developments.
Despite a significant reduction in interest rates, the monetary policy is not working its way through the economy, as the government remains the single largest borrower due to a steep decline in tax revenues, according to independent experts. This has left little credit for the private sector to borrow.