Pakistan cuts key rate to boost growth

22/05/2016 07:06 AST

Pakistan’s central bank unexpectedly lowered its benchmark interest rate for the first time since September to boost economic growth before the government presents its budget for the new financial year.

The State Bank of Pakistan cut the target policy rate to 5.75 per cent from 6 per cent, it said Saturday in an e-mailed statement in Karachi.

All 22 economists surveyed by Bloomberg had predicted no change. “It seems to be a populist decision before the budget,” Saad Khan, economist at IGI Finex Securities Ltd., said by phone.”They are talking about rising inflation but still decided to cut it. It doesn’t really make any sense to me.”

Macroeconomic conditions continue to improve and inflation, despite a steady increase, should remain below the annual average target of 6 per cent, the central bank said in the statement.

Consumer prices rose 4.2 per cent in April, the fastest pace since December 2014.”Inflation is likely to attain a higher plateau” in the next fiscal year, according to the statement.

Prime Minister Nawaz Sharif, who lowered Pakistan’s growth forecast for the year through June 30 to 5 per cent from 5.5 per cent, is seeking to increase the pace to 6 per cent in next year.

His administration will present its budget on June 3 and an International Monetary Fund programme is reaching its close with the final review in August.

SBP said that as expected, headline CPI inflation sustained its rising trend for the seventh consecutive month and on Year on Year basis rose to 4.2 per cent in April 2016 from the low of 1.3 per cent in September 2015.

In addition to the seasonal impact of perishable food items and services, this increase owes to further waning of the base effect and second round impact of decline in oil prices. Similarly, core inflation measures had broadly followed a rising trend in this fiscal year indicating buildup of underlying inflationary tendencies.

Despite these trends and developments, the inflation outlook for fiscal year 2015-16 was low. However, going into fiscal year 2016-17 inflation was likely to attain a higher plateau.

“GDP growth in FY16 is expected to provide the needed sustainability in growth trajectory and the basis for further improvement in FY17,” the bank said in a statement.

It added that foreign exchange reserves are expected to continue building, while the current account deficit will be at around 1 per cent of GDP.

Potential headwinds for the economy may come from an increase in global oil prices, the bank said. Pakistan is a net importer of oil.

Pakistan missed the economic growth target for the current financial year by a wide margin mainly because of widespread dismal performance by the agriculture sector. The gross domestic product (GDP) grew by 4.7 per cent against the target of 5.5 per cent.

At a recent meeting of the national accounts committee comprising senior representatives from the four provinces and regions and technical experts, the performance of all economic sectors was added up that showed higher than targeted growth by the industrial sector. The services sector achieved its growth target of 5.7 per cent.

The Gulf Today