State Bank decreases interest rate to 10 per cent

In response to what have been characterized as steadily improving inflation figures, the State Bank of Pakistan has cut its benchmark interest rate from 10.5% to 10%.

The SBP earlier in August had reduced the interest rate by 150 basis points amid an improved inflation projection for 2012-13 and for encouraging private investment. The move set the trend for future cuts.

Since July the SBP has reduced the rate by 400 basis points. The monetary policy (October-November) announced on Friday was based on inflationary trend with an assumption that the year’s target of single-digit inflation would be achieved.

“A consistent deceleration in inflation since May to 8.8 per cent in September 2012 is more than earlier estimates. The likelihood of meeting the 9.5 per cent inflation target for FY13 has increased,” said the policy statement.

However, the State Bank expressed serious concern over massive government borrowings from scheduled banks and over the role of banks in the economy.

High inflation made the money costlier for the private sector while banks chose easy way to earn profits by investing in government papers. The private sector is now practically out of banking money.

“The year-on-year growth in loans to private sector businesses has declined from 22.4 per cent in FY08 to 0.7 per cent by the end of FY12,” the SBP said, adding that a declining interest rate environment should lead to a rethink of this strategy.

The policy statement said, “Scheduled banks will have to step up efforts to go back to their basic intermediary role and channel loanable funds to the private sector. 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.”

However, it said the effectiveness of SBP’s current monetary policy stance continued to weigh upon improvement in the fiscal position, better availability of energy and an increase in foreign financial inflows.

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Posted by Faisal Farooq on Oct 6 2012. Filed under Business, Pakistan. You can follow any responses to this entry through the RSS 2.0. You can skip to the end and leave a response. Pinging is currently not allowed.