The Central Board of Directors of State Bank of Pakistan on Friday decided that the policy rate will be reduced by 50 basis point to 9 per cent with effect from June24.
In a statement about its monetary policy decision, SBP cited reducing inflation and provision of low private sector credit as the reason for this move.
"Due to almost zero net external financing in FY13, the burden of financing the sizeable deficit of 8.8 percent has fallen disproportionately on domestic sources, in particular the banking system," SBP said in its statement.
The statement said that it is the financing pressure of the fiscal position that is source of the stress, from the monetary policy perspective.
"During 1st July to 7th June, financial year 2013, fiscal borrowings from the banking system for budgetary support were Rs1230 billion, including Rs413 billion from the SBP," said SBP.
The high level of these borrowings has put a strain on the system's liquidity and has proved to be a hindrance to the growth of private sector credit which the SBP aims to counter by reducing its policy rate by 50 basis points.