SBP brings policy rate down to 10%

The State Bank has also taken measures to strengthen the liquidity management framework.

KARACHI: The State Bank of Pakistan (SBP) has cut its policy rate by 50 basis points bringing it down to 10% from 10.5% with effect from October 8, 2012.

The decision to cut the policy rate was taken by the Central Board of Directors of the State Bank of Pakistan at its meeting held under the chairmanship of SBP Governor, Yaseen Anwar in Karachi on Friday.

To strengthen the liquidity management framework, the SBP has also decided to implement certain measures, details of which will be issued separately.

“A consistent deceleration in inflation since May 2012, to 8.8% in September 2012, is more than earlier estimates. Thus, despite an expected uptick in H2-FY13, the overall inflation outlook has improved. In fact, the likelihood of meeting the 9.5% inflation target for FY13 has increased,” the Monetary Policy said, adding that at the macro level, it seems that the effect on inflation of falling private investment demand is becoming more pronounced than the influence of high fiscal borrowings.

“The disaggregate CPI inflation data also show that this could be a beginning of a broad based trend. The number of commodities with double digit year-on-year inflation has slightly come down in the last few months after a secular increase over the last three years; first in the food group and now in the non-food group as well.”

The decline in 20% trimmed core inflation measure, to 10.4% in September 2012, is slower than the fall in CPI inflation. “This indicates persistence of inflation expectations due to inertial effect of high inflation experienced in the recent past, overall rising trend in fiscal borrowings from the SBP, and depreciation of exchange rate,” it said.

The statement added that the recent fall in inflation together with a retirement of Rs412 billion of fiscal borrowings from SBP during Q1-FY13 could bring down core inflation further by having a beneficial impact on inflation expectations. This would depend, however, on the fiscal authority’s resolve to maintain this trend in the coming quarters, the Monetary Policy observed.

While discussing the previous rate cut announced in August 2012, the Monetary Policy said that a declining inflation together with weak growth in credit to private businesses was the basic context in which SBP reduced its policy rate by 150 bps in August 2012.

“The resumption of monetary easing, in this environment, was deemed necessary to influence the behavior of borrowers in the private sector and scheduled banks to step up efforts to improve their intermediary role,” the Monetary Policy said and added that a host of factors needs to be considered for this to be sufficiently effective.

“Prominent among these are considerable improvement in the availability of energy and reduction in fiscal borrowing needs from the banking system. The former is expected to facilitate an increase in the demand for credit and the latter would help in improving the supply of credit to the private sector. Further support to SBP’s initiative can come from realisation of expected foreign financial inflows that would alleviate the balance of payment concerns and help in easing the considerable fiscal pressure on domestic borrowings,” it said.

“The effectiveness of SBP's current monetary policy stance continues to weigh upon improvement in the fiscal position, better availability of energy, and an increase in foreign financial inflows,” it added.

The monetary policy statement can be viewed here.