SBP likely to cut policy rate today

[LahoreEstate]

Tuesday, November 24, 2009
KARACHI: The State Bank of Pakistan is likely to cut its key policy rate by 50 or 100 basis points on Tuesday to spur economic growth which fell to its slowest in eight years, analysts said on Monday.

The International Monetary Fund (IMF), which bailed out Pakistan to avert a balance of payments crisis in 2008, has repeatedly urged caution on cutting interest rates unless “economic and financial conditions permit.”

At its previous review in September, the State Bank of Pakistan (SBP) kept the policy rate unchanged at 13 per cent after cutting it by 100 basis points in August. “With inflation at a 22-month low, coupled with an improving external position, a cut in the policy rate is likely,” said Mohammed Sohail, chief executive at Topline Securities.

The central bank is due to announce its monetary policy decision on at 5pm on Tuesday. Analysts said the central bank would cut the policy rate to spur growth which had slipped to 2 per cent in 2008/09, the lowest since 2000/2001, in the last fiscal year ended in June.

But some expect the central bank to remain cautious and cut rates by 50 basis points to 12.5 per cent as continued government spending and rising commodity prices pose a threat to inflation.

In August, the IMF said in a review that its staff argued that rates should remain on hold until core inflation shows a further significant decline. Pakistan’s consumer price index rose 8.87 per cent in October, the slowest pace in 22 months, according to official data. Core inflation has eased to 11 per cent last month from 12.6 per cent in August.

Inflation peaked at a record high of 25.3 percent in August 2008 because of higher commodity and oil prices before easing in 2009. Pakistan pledged to keep its fiscal deficit at 4.9 per cent of gross domestic product in the 2009/10 fiscal year under a deal with the IMF.

The Finance Ministry has yet to report figures for the first quarter of this fiscal year but analysts expect the deficit to overshoot the target by 0.3 per cent.However, central bank governor Salim Raza said this month the country should meet the fiscal deficit target for the first six months of 2009/10 fiscal year.

http://thenews.com.pk/daily_detail.asp?id=210099