State Bank lowers interest rate to 9%

The reduction of 0.5% in the discount rate will be effective from June 24.

Kazim Alam June 21, 2013
Besides a change in sentiments, the central bank also cited better inflation numbers and below-potential gross domestic growth rate as reasons for a reduction in the policy rate.

KARACHI: The wave of post-election optimism surging through the entire nation seems to have swept the central bank as well.

In its monetary policy decision for the next two months announced on Friday, the State Bank of Pakistan (SBP) cut the discount rate by 50 basis points to 9%, citing a ‘discernible positive change in sentiments’ in the post-election scenario ‘mainly on account of clarity on the political front’.

The reduction of 0.5% in the discount rate – which is the interest rate at which the SBP lends money to commercial banks from its discount window – will be effective from June 24.

The rate cut is largely unexpected, as each of the five banking sector analysts The Express Tribune spoke to on May 27 predicted the central bank would keep the discount rate unchanged in June’s monetary policy decision. Similarly, 10 of the 13 banking sector analysts predicted that it would remain unchanged in a Bloomberg News survey held prior to the announcement.

“There has been a considerable improvement in SBP conducted surveys of consumer confidence, expected economic conditions, and inflation expectations,” the SBP monetary policy statement said, while arguing for a cut in the discount rate despite a persistent balance of payment crisis.

The SBP maintained the policy rate at 9.5% in the last two monetary policy decisions. In the preceding two years, however, it has reduced the interest rate by as much as 450 basis points mainly due to a declining inflation rate that is reflected in the Consumer Price Index (CPI).

“The central bank has not only acknowledged the clear mandate of the ruling party to bring fundamental reforms in the economy, it has also responded to it by lowering the interest rate, which will help spur growth in the private sector,” said Muhammad Imran, head of equity sales at Arif Habib Limited – one of the largest brokerage firms of Pakistan.

Besides a change in sentiments, the central bank also cited better inflation numbers and below-potential gross domestic growth rate as reasons for a reduction in the policy rate. Indeed, the central bank would base its monetary policy decisions on inflation numbers to a large extent during the past few years. No wonder then the cut of 50 basis points in the discount rate comes on the heels of the year-on-year CPI inflation of 5.1% in May – the lowest it has been since October 2009. Moreover, the SBP expects that the average CPI inflation for fiscal year 2013-14 will remain at least two percentage points below the target of 9.5%.

Hence, the SBP’s decision to reduce the interest rate based – at least in some part – on the inflation trend is only consistent with its past practice. One consequence of a declining inflation rate is that the real interest rate – which is the policy rate minus the expected inflation rate – will likely increase. Therefore, the cut in the policy rate makes sense in view of the old rule of keeping real interest rates in the economy close to zero. However, the SBP did mention that there is no significant revision in the assessment of the balance of payments (BoP) position since the last monetary policy decision. Interestingly, it noted that the BoP position was a prime consideration in maintaining the policy rate at 9.5% in the last two decision announcements.

“I don’t think there would’ve been a significant impact on the BoP situation had the SBP decided to leave the rate unchanged. By decreasing it by 50 basis points, however, there is at least hope that growth and investment in the private sector will follow,” Imran said.

Published in The Express Tribune, June 22nd, 2013.


Realist | 8 years ago | Reply

So junk rated is not even a word?? buddy, junk is a credit rating. it seems you don't work in finance!

CrankShaft | 8 years ago | Reply

@Realist Please do tell how economic theory implies that US UK France and Japan are "junk rated" (which isn't even a word)? Or why their interest rates should be hire?

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