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State Bank of Pakistan Cuts Discount Rate by 50 Basis Points

Posted by on Sunday, November 16, 2014, 12:22
This news item was posted in Business category and has 0 Comments so far .
State Bank of Pakistan

State Bank of Pakistan

State Bank of Pakistan (SBP) Saturday reduced its key discount rate to 9.5 percent from 10.0 percent, news reported. According to a statement issued, the decision was taken by the Central Board of Directors of SBP at its meeting held under the chairmanship of Governor Ashraf Mahmood Wathra here on Saturday.

The complete text of the monetary policy decision is as follows:

Limited impact of floods and a favorable trend in global commodity prices are the major highlights of the post-September monetary policy decision.

Indeed, CPI inflation (YoY) in October 2014 has come down sharply to 5.8 percent.

This decline is explained by: Smooth food supplies, which contained the price of perishable items; falling administered prices, which incorporate the fall in international commodity prices, especially oil; low inflation expectations, as witnessed by IBA-SBP consumer confidence surveys; and a significant base effect. These developments bode well for the outlook of other macroeconomic variables in general.

Given its recent downward trend, the likelihood for inflation to end the current fiscal year on a lower plateau is high. But, there are risks.

First, downward trend over the medium to long term remains to be seen because it is based on volatile prices of “perishable items” and “oil”.

Second, other risks identified in the previous statement, such as a cut in subsidy to electricity and levying of Gas Infrastructure Development Cess, still hold and if materialized can alter the inflation outlook on a higher side. Third, underlying inflationary pressures on core inflation remain.

The current low oil price could salvage some of the lost growth momentum. Broadly, however, growth in Large-scale manufacturing would remain constrained due to energy bottlenecks.

Thus the main thrust to the growth momentum would come from agriculture outcomes in the remaining months of FY15.

Barring the limited flood-related damage to some kharif crops, agriculture output is expected to perform better than the previous year especially now when incentive for Rabbi Season crops has been announced; such as, the recent increase of Rs100 in wheat support price.

Government has shown a significant progress in curtailing budgetary imbalances. It seems on course to achieve further fiscal consolidation, given its current management of expenditures and borrowing pattern.

It has positive implications for the monetary management of the SBP and more importantly, in the coming months, it would have a favorable impact on the private sector credit cycle. However, to achieve fiscal consolidation in the long run, structural reforms to broaden the tax base remain imperative.

Low oil price along with falling inflation can improve competitiveness of Pakistani exports. Imports, on the other hand, might take advantage of low global commodity prices and increase further in the rest of FY15.

This, at the same time, given the significant imports intensity for exports sector in Pakistan, could add to exports competitiveness and improve its outlook towards the end of the current fiscal year.

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