Pak­istan Un­ex­pect­edly Cuts Bench­mark Rate to 42-Year Low

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Pak­istan’s cen­tral bank un­ex­pect­edly cut its bench­mark in­ter­est rate to the low­est in 42 years in an at­tempt to spur eco­nomic growth as in­fla­tion slows in the sixth- most pop­u­lous na­tion.

The State Bank of Pak­istan low­ered the dis­count rate for a fourth straight meet­ing to 7 per­cent from 8 per­cent, cen­tral bank Gover­nor Ashraf Mah­mood Wathra said Satur­day in Islamabad. That’s the low­est since Au­gust 1973. Four­teen of 15 econ­o­mists in a Bloomberg sur­vey pre­dicted a cut to 7.5 per­cent; one saw a re­duc­tion to 7 per­cent.

In­fla­tion in South Asia’s sec­ond- largest econ­omy has eased each month this year as trans­port and food prices fell, giv­ing the cen­tral bank room to boost growth that the In­ter­na­tional Mon­e­tary Fund pre­dicts will be slower than pre­vi­ously fore­cast.

“They are main­tain­ing the na­tion’s up­ward growth strat­egy” with this cut, Saad Khan, an econ­o­mist with Karachi- based bro­ker­age Arif Habib Ltd., said by phone. “This is su­per good news and will help eq­ui­ties rally.”

Pak­istan’s bench­mark stock in­dex is the third- best per­former in the world since 2009, ac­cord­ing to data com­piled by Bloomberg. Tex­tile ship­ments make up al­most half of the ex­ports in the fourth- largest cot­ton and rice pro­ducer.

Tar­get Rate

The cen­tral bank an­nounced a new tar­get for the overnight repo rate at 50 ba­sis points or half a per­cent­age point be­low the bench­mark to bet­ter man­age liq­uid­ity in the in­ter­bank mar­ket as part of the IMF loan pro­gram.

The new rate is part of a band where the bench­mark is the ceil­ing and repo is the floor. The floor rate has been set at 5 per­cent af­ter re­duc­ing the band by 50 ba­sis points, ac­cord­ing to a bank state­ment on the web­site.

Satur­day’s de­ci­sion came af­ter the IMF this month scaled back Pak­istan’s growth fore­cast for the year through June to 4.1 per­cent from 4.3 per­cent and 4.5 per­cent from 4.7 per­cent for the fol­low­ing 12 months.

The coun­try is still mak­ing “sig­nif­i­cant progress” in meet­ing tar­gets un­der a $ 6.6 bil­lion loan pro­gram and the next tranche of $ 506 mil­lion may be re­leased by mid- June, IMF Pak­istan mission chief Har­ald Fin­ger said this month.

The lat­est rate re­duc­tion will prob­a­bly be the last for sev­eral months as a re­bound in oil costs will spark price pres­sures, econ­o­mists said.

‘ In­fla­tion­ary Pres­sures’

“The de­ci­sion has been taken to spur pri­vate­sec­tor bor­row­ing and en­cour­age busi­ness ac­tiv­ity,” Adeel Ahmed Khan, chief ex­ec­u­tive of­fi­cer at BMA As­set Man­age­ment Co. in Karachi, said be­fore the an­nounce­ment. “With global oil prices ris­ing, I pre­dict the gov­ern­ment now will be faced with in­fla­tion­ary pres­sures that may force the cen­tral bank to hold rates.”

In­fla­tion will av­er­age about 4.2 per­cent in 2015 be­fore ac­cel­er­at­ing to 5.4 per­cent in 2016, ac­cord­ing to a Bloomberg sur­vey pub­lished in April. Con­sumer prices rose 2.11 per­cent in April, the slow­est rate in Bloomberg data go­ing back to 2009.

Stan­dard & Poor’s and Moody’s In­vestors Ser­vice have raised their out­looks on Pak­istan’s credit rat­ing to pos­i­tive from sta­ble since March. The firms cited Pak­istan’s im­prov­ing fi­nan­cial po­si­tion and growth prospects as Prime Min­is­ter Nawaz Sharif sells state as­sets and courts Chi­nese in­vest­ment to help nar­row the bud­get deficit.

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