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.
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.