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Pakistani central bank cuts key rate to 12%
By SAHAR AHMED | REUTERS
Published: Oct 9, 2011 00:00 Updated: Oct 9, 2011 00:00
KARACHI: Pakistan's central bank on Saturday cut its key policy rate by 150 basis points to 12 percent for the subsequent two months, citing a decline in inflation and government borrowings, it said in a statement.
This again exceeded expectations as analysts polled by Reuters earlier this week projected a cut in interest rates between 50 and 100 basis points.
The central bank said it cut its policy rate by 150 basis points as it was "taking some comfort from declining inflation and high probability of meeting the FY12 inflation target together with a need to support private sector credit and investment growth."
In September, annual consumer inflation was 10.46 percent, compared with 11.56 percent in August, and 13.77 percent in July, mainly due to a high base effect which is to last through December. Although inflation had risen month-on-month by over 1 percent.
However, the central bank said there was a high probability that Pakistan would meet its target of average inflation at 12 percent for 2011/12 fiscal year.
The decline in government borrowing from the central bank was also one of the reasons for the rate cut, the SBP said.
According to provisional data, the outstanding stock of government borrowings was Rs.1,051 billion ($12 billion) on Sept. 30, lower than the agreed limit of Rs.1,155 billion ($13.22 billion) for the 2011/12 fiscal year.
"This is higher than expected and it seems to be that since the government is the largest borrower, the State Bank decided to ease some fiscal pressures for them in terms of debt servicing costs," said Khalid Iqbal Siddiqui, director at Invest & Finance Securities Ltd.
The government's domestic borrowing for fiscal year 2011/12 is Rs.6,230 billion ($71.3 billion).
This was the first monetary policy announcement after Pakistan ended its $11 billion International Monetary Fund (IMF) loan program on Sept. 30. It is also the second rate cut in fiscal year 2011/12 (July-June).
Only $8 billion was disbursed, as the program was halted due to the country's slow implementation of fiscal reforms.
"This surprising cut shows central bank's focus on economic growth at a time when IMF support is no longer there," said Mohammed Sohail, chief executive at Topline Securities Ltd.
Pakistan's economic growth was an anemic 2.4 percent in the 2010/11 fiscal year against a target of 4.5 percent.
The fiscal deficit widened to 6.6 percent of gross domestic product for 2010/11, compared with the earlier estimates of 5.3 percent and it aims to contain the deficit at 4 percent in the year ending June 30.
The rate cut would be welcomed by Pakistan's main stock index but would put pressure on the rupee, which hit a record low of 87.92 to the dollar last month, analysts said.
"This may put pressure on the rupee while equity and bonds will rally," said Mohammed Sohail, chief executive at Topline Securities Ltd.
Pakistan raised rates by 50 basis points in November 2010, and held them steady until it cut rates by 50 basis points to 13.5 percent on July 30, also exceeding analyst expectations.
"This is the largest decrease (150 basis points) in policy rate since July 2003, when the monetary policy statement was first issued," said Syed Wasimuddin, chief spokesman of the central bank.
The government also benefits directly from lower funding costs through treasury bills and Pakistan Investment Bonds.
All this has led to some speculation that any rate cut may be partly driven by government demands, wanting to reduce borrowing costs especially as elections are approaching.
© 2010 Arab News
By SAHAR AHMED | REUTERS
Published: Oct 9, 2011 00:00 Updated: Oct 9, 2011 00:00
KARACHI: Pakistan's central bank on Saturday cut its key policy rate by 150 basis points to 12 percent for the subsequent two months, citing a decline in inflation and government borrowings, it said in a statement.
This again exceeded expectations as analysts polled by Reuters earlier this week projected a cut in interest rates between 50 and 100 basis points.
The central bank said it cut its policy rate by 150 basis points as it was "taking some comfort from declining inflation and high probability of meeting the FY12 inflation target together with a need to support private sector credit and investment growth."
In September, annual consumer inflation was 10.46 percent, compared with 11.56 percent in August, and 13.77 percent in July, mainly due to a high base effect which is to last through December. Although inflation had risen month-on-month by over 1 percent.
However, the central bank said there was a high probability that Pakistan would meet its target of average inflation at 12 percent for 2011/12 fiscal year.
The decline in government borrowing from the central bank was also one of the reasons for the rate cut, the SBP said.
According to provisional data, the outstanding stock of government borrowings was Rs.1,051 billion ($12 billion) on Sept. 30, lower than the agreed limit of Rs.1,155 billion ($13.22 billion) for the 2011/12 fiscal year.
"This is higher than expected and it seems to be that since the government is the largest borrower, the State Bank decided to ease some fiscal pressures for them in terms of debt servicing costs," said Khalid Iqbal Siddiqui, director at Invest & Finance Securities Ltd.
The government's domestic borrowing for fiscal year 2011/12 is Rs.6,230 billion ($71.3 billion).
This was the first monetary policy announcement after Pakistan ended its $11 billion International Monetary Fund (IMF) loan program on Sept. 30. It is also the second rate cut in fiscal year 2011/12 (July-June).
Only $8 billion was disbursed, as the program was halted due to the country's slow implementation of fiscal reforms.
"This surprising cut shows central bank's focus on economic growth at a time when IMF support is no longer there," said Mohammed Sohail, chief executive at Topline Securities Ltd.
Pakistan's economic growth was an anemic 2.4 percent in the 2010/11 fiscal year against a target of 4.5 percent.
The fiscal deficit widened to 6.6 percent of gross domestic product for 2010/11, compared with the earlier estimates of 5.3 percent and it aims to contain the deficit at 4 percent in the year ending June 30.
The rate cut would be welcomed by Pakistan's main stock index but would put pressure on the rupee, which hit a record low of 87.92 to the dollar last month, analysts said.
"This may put pressure on the rupee while equity and bonds will rally," said Mohammed Sohail, chief executive at Topline Securities Ltd.
Pakistan raised rates by 50 basis points in November 2010, and held them steady until it cut rates by 50 basis points to 13.5 percent on July 30, also exceeding analyst expectations.
"This is the largest decrease (150 basis points) in policy rate since July 2003, when the monetary policy statement was first issued," said Syed Wasimuddin, chief spokesman of the central bank.
The government also benefits directly from lower funding costs through treasury bills and Pakistan Investment Bonds.
All this has led to some speculation that any rate cut may be partly driven by government demands, wanting to reduce borrowing costs especially as elections are approaching.
© 2010 Arab News
