The central bank of Pakistan cut its policy rate by another 50 basis points to 10.0 percent, a move that was expected by economists, due to an improved outlook for inflation.
The State Bank of Pakistan (SBP), which also cut its policy rate by 150 basis points in August, for a total of reduction of 200 basis points this year, said inflationary expectations persisted due to high rates in the past, but this may change as inflation continues to decline.
"A consistent deceleration in inflation since May 2012, to 8.8 percent in September 2012, is more than earlier estimates. Thus, despite an expected uptick in H2-FY13 the overall inflation outlook has improved," the SBP said in a statement.
With the decline in inflation to 8.8 percent from 9.10 percent in August, inflation hit its lowest rate since December 2009, a move that fueled hopes the SBP would cut rates today. The SBP said it was increasingly likely that it would meet its 9.5 percent inflation target for fiscal 2013.
The SBP called on comprehensive fiscal reform and a lower government deficit, which would have a positive influence on commercial banks that currently find it easy to avoid lending to the private sector by extending credit to the government without any risk.
"A declining interest rate environment should leads towards a rethink of this strategy," the SBP said, noting that lending to the private sector declined to an annual rate of 0.7 percent at then end of fiscal 2012 from 22.4 percent in fiscal 2008.
A persistent shortage of energy is also holding back the private sector and the SBP called for an overhaul of the governance of the energy sector, which would also help growth and lower the amount of subsidies and thus the borrowing requirements.
"Thus, at a broader level, the effectiveness of SBP's current monetary policy stance continues to weigh upon improvement in the fiscal position, better availability of energy, and an increase in foreign financial flows," the SBP said.
Pakistan's Gross Domestic Product expanded by an annual rate of 3.67 percent in the second quarter from 3.04 percent in the first quarter.
The SBP said it would also strengthen its liquidity management framework and would issue details of these measures separately.