Economists expect surprise cut in interest rate: Monetary Policy on April 20

[Naveed Yaseen]

RIZWAN BHATTI
KARACHI (April 15 2009): Economists expect the State Bank of Pakistan (SBP) would announce interest rate cut by some 100-200 basis points in the next monetary policy to relieve the under-stress economy. SBP said on Tuesday said that it would announce monetary policy statement for the last quarter of the fiscal year 2008-09 on Monday, April 20.

"The central bank will issue monetary policy for the April-June quarter on April 20, 2009," said Wasimuddin, chief spokesman of SBP. It would be third policy statement during the current fiscal year. Earlier the policy statements were being made after six months. However, in January SBP Central Board of Directors decided to issue the monetary policy statement on quarterly basis due to the rapid development in the economic indicators.

At present, economists are expecting a surprise cut in interest rate as inflation has eased from a record high of 25.3 percent in August last year to 19.07 percent in March 2009.

"We are expecting that the central bank would cut interest rate by 200 pbs in the next monetary policy statement as the inflation is substantially declining," said Muzammil Aslam, an economist at KASB, adding that overall 400 bps reduction was expected during the current calendar year, and the policy rate would be at 11 percent by the end of CY 2009.

He said that economic slowdown, increasing unemployment, negative growth in large scale manufacturing might put constraint on fiscal space in the monetary policy. "Therefore, we expect that SPB will lead from front to meet these challenges, and cut the interest rate, because SPB has already claimed no-inflationary borrowing from central bank," Muzammil said.

He said that month on month inflation has declined by some 4 percent during the last three months and reached 19 percent in March as compared to 23 percent in December 2008, while inflation was 20 percent in January and 21 percent in February.

He said he believed that if SBP would not cut the interest rate then there would be some signals for policy makers for inflation increase and twin deficit risk as described by IMF.

"There is scope for a cut in its discount rate after a fall in inflation and some increase in foreign exchange reserves," said another economist. However, he said that the reduction would not be more than 100 bps. "Its the right time that SBP should address the economic issues by providing some relief in the interest rate," he said.

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