State Bank cuts interest rate by 0.5%

The central bank reduced interest rate by 0.5 percent and brought it down to six percent.

The President, Lasbela Chamber of Commerce and Industry (LCCI), Yakoob H Karim has welcomed the State Bank of Pakistan’s (SBP) decision to reduce 50 basis points in its Monetary Policy and demanded a swift cut in Export Refinance Rate to provide breathing space to the export-oriented industry.

Central banks use this monetary policy tool to control money supply in the economy in order to achieve price stability and economic growth targets. Previously the interest rate on loan was 6.5% but now it has been set at 6%.

Inflation rate has also been recorded at 1.7% in the month of August.

It is expected that inflation would continue its existing downward trajectory and low worldwide oil prices would also act as a catalyst for low inflation.

Given the decline of approximately 21% in crude oil prices in the fiscal year to date, ample foreign exchange reserves ($18.59 billion) and expected inflation of 2%-3% in the second quarter of the fiscal year, Shajar Capital analyst Yawar Uz Zaman says there is a “high probability” of a 0.5% downward adjustment in the policy rate.

Discussing the balance of payments, the SBP said that due to the dropping prices of oil in the global market and rising remittances, the balance of payments has improved. This is supported by the expected surplus in the capital and financial account in FY16 on the back of planned Euro/Sukuk bonds inflows, official disbursements, and the remaining International Monetary Fund funding under the EFF program.

Recent improvement in law and order situation and continued macroeconomic stability are likely to increase the prospects for long-term foreign capital inflows. Moreover, going forward, much needed boost to Pakistani exports may come through United States economic recovery and through further gains in EU’s GSP-Plus scheme.

The policy report warned that structural bottlenecks and fall in the prices of food items in worldwide market are still posing serious threat to exports.

The contraction in broad money (M2) during 1st July to 28th August, 2015 was mainly a result of reduction in net domestic assets of the banking system.

Atmosphere for investment will grow more congenial with the implementation of power projects and development of infrastructure under Pakistan-China Economic Corridor (PCEC).

Therefore, there is anticipation of higher economic activity in FY16 which is expected to boost credit uptake.