Monetary policy: Central bank cuts discount rate by 0.5%

Published: July 31, 2011

Cites expectations of inflation staying within announced target as reason for the decision. PHOTO: FILE

KARACHI: 

After years of raising and maintaining a high interest rate despite popular clamour, the State Bank of Pakistan (SBP) on Saturday announced to cut the key discount rate by 50 basis points to 13.5 per cent, effective August 1, 2011.

“We do not see immediate worry over the rise in inflation,” said acting Governor Yaseen Anwar while explaining unveiling the monetary policy.

Average inflation is expected to remain within the ‘line of announced target’ of 11 to 12 percent in fiscal year 2012, he said.

The decision was against market expectation as all eleven analysts polled by The Express Tribune on Thursday forecast that the central bank’s will leave the discount rate unchanged at 14 per cent.

The discount rate, revised every two months, is the interest charged by the central bank when it lends to other banks.

Anwar dispelled the perception that the rate has been reduced under government’s pressure.

“Our board is independent and we took this decision with the consensus of our members,” he said.

Government borrowing

While the government adhered to restricting the stock of its borrowings from SBP, its borrowing from scheduled banks has increased substantially.

Government borrowing to finance its budget deficit contributes largely to inflation in the economy and crowds out investment in the private sector, weakening the productive capacity of the economy.

Given that the government’s borrowing from scheduled banks increased by 74.5 percent in fiscal 2011, persistent inflation is not a surprising pgenomenon.

The central bank observed that government borrowing from scheduled banks will need to be ‘monitored closely to assess potential risks for macroeconomic stability.’

Anwar, however, said that the government has expressed its commitment to continue with a stance of zero borrowings from SBP in yearly flow terms in fiscal 2012, which bodes well for anchoring inflation expectations.

He stressed that ‘an effective implementation of fiscal reforms, especially those related to broadening of the tax base, and better coordination with the provinces are urgently required.’

Published in The Express Tribune, July 31st,  2011.

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Reader Comments (5)

  • Dr Ali Huesien
    Jul 31, 2011 - 4:15PM

    Second highest rate of Inflation in Asia and State Bank reduces Interest rate by 0.5%.

    I guess the Acting Governor of State Bank must have studied at non-HEC approved University.

    This action defies all logic and principles of sound monetary policy

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  • Haider Hussain
    Aug 1, 2011 - 9:43AM

    A cut in Discount Rate at this point doesn’t make sense at all. The best thing SBP could do was to keep it at 14.0%.Recommend

  • Aug 3, 2011 - 6:24PM

    SBP needs to act faster to remove the label of ‘regional pariah’ from Pakistan’s economy. The benchmark interest rate needs a 500-basis-points shed-off in quick successive cuts, Let the interest rate stabilize around 8 percent and learn to live with regional economies. Our economy has great potential. Don’t stifle it on bookish economic grounds or for the sake of political agendas of wayward nomadic rulers.

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  • Haider Hussain
    Aug 4, 2011 - 9:27AM

    @Shamsul Ghani:
    Bringing down interest rate only because our interest rates are higher than regional economies is perhaps the weakest explanation for an expansionary monetary policy. And by the way, same explanation has been offered by key stock brokers since long. Why? because it will help in boosting stock market volumes, which is it self a politically motivated call.

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  • Amg
    Aug 4, 2011 - 6:30PM

    On a slightly different note, this could have a positive impact on the credit-starved small and medium sized businesses, especially when one considers the crippling energy shortages and volatile law and order situation that paints a bleak future growth forecast. Entrepreneurs need some incentive to invest and a liquidity injection, if nothing else, could be an effort at doing something different. Personally, I am amazed that the central bank took this decision given its biggest short-term creditor, the IMF’s insistence on keeping money supply in check. Also, its absolutely hypocritical on part of the government to have a ‘ zero-borrowing policy’ from the central bank yet perform the same function through commercial banks.

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