Calling the limited impact of floods and a downward trend in global commodity prices “major highlights of the post-September monetary policy decision,” the central bank reduced the key interest rate in the economy by 50 basis points for the next two months.
It is the interest rate at which commercial banks are allowed to borrow from the central bank’s discount window on an overnight basis.
The SBP had kept the policy rate flat since November 2013 when it increased it by 50 basis points.
The SBP uses monetary policy to change the level of money supply in the economy. Inflation increases if the money supply expansion outpaces the targeted rate of nominal GDP growth. Conversely, real economic activity suffers if money supply expands at a slower pace than the targeted rate of real GDP growth.
Speaking to The Express Tribune, Standard Capital Securities Head of Research Faisal Shaji said the SBP’s decision will bode well for the economy. However, Shaji added the latest data on the Consumer Price Index (CPI) warranted a rate cut of 150 basis points because of declining oil prices globally.
CPI hit a 17-month low of 5.82% in October, thus pushing the inflation-adjusted inflation rate in the economy to 4.18%. According to Global Securities, inflation-adjusted inflation rates in the last three years have averaged around 1.78%. The latest data provided the central bank with ‘sufficient room’ to cut the discount rate, the brokerage house said in its pre-policy announcement commentary.
In its statement, the SBP said it expects inflation to remain on a ‘lower plateau’ by the end of the fiscal year. However, it listed volatility in the prices of perishable items and oil among key risks. In other words, a shift in the recent downward trend in commodity prices can dampen the SBP’s optimism on the inflation outlook.
Moreover, the SBP said a cut in power subsidies and the imposition of the Gas Infrastructure Development Cess also threaten its expectation of relatively low inflation in the rest of 2014-15.
Topline Securities CEO Mohammed Sohail described the rate cut as ‘better late than never’. “There is room for further cut in the policy rate if oil prices remain low and inflows from Sukuk and IMF tranches materialise,” he said.
The SBP’s statement shows it is counting on foreign exchange inflows for domestic liquidity creation, as they will help banks extend more credit to the private sector.
According to Shajar Research, Pakistan expects $2.32 billion by the end of March through the Sukuk auction and the sale of government stakes in Habib Bank and Allied Bank.
Acknowledging energy bottlenecks, the central bank said growth in the large-scale manufacturing sector is likely to remain constrained going forward. However, it expects agriculture output to remain better in the remaining months of 2014-15 than the preceding year in view of the recent hike in the wheat support price.
As for publicly traded companies, analysts expect leveraged sectors like textile and cement to benefit from the policy rate cut. “We remain bullish on the capital market,” said a post-announcement research note from Standard Capital Securities.
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The commendable decision by the central bank to reduce the benchmark interest rate is a testimony of the fact that the Federal Government is serious about improving the economy. The vast majority of Pakistanis have condemned the dharna & all negativities of a few losers and now stand firmly behind the government. Long Live Pakistan!
This is very heartening! It takes courage to lower but the macro environment and rupee are now stable ... and this will directly benefit the businesses that have so far been suffering from high interest rates
Well done!!!!