Pakistan's central bank cut its policy rate by 50 basis points to 9.5 percent as inflation is falling faster than expected and should end the fiscal year below the bank's 9.5 percent target.
The State Bank of Pakistan (SBP), which has now cut its policy rate by 250 basis points this year, said the economy's output gap was almost negligible while food supplies were better this year than in the previous two years, resulting in a "sharply decelerating CPI inflation."
Pakistan't inflation rate fell to 6.9 percent in November, a low for the year, from 7.7 percent in October, with food inflation dropping to 5.3 percent and non-food inflation at 8.1 percent.
"This broad based deceleration in inflation is now expected to keep the average inflation for FY13 below the 9.5 percent target for the year," the bank said in a statement after a meeting of its board of directors.
Credit extended to private businesses remains muted and is "not encouraging despite a cumulative 400 basis point reduction in the policy rate over the last 16 months," the bank said, adding the credit outlook for the year was not encouraging despite a seasonal pick up since mid-October.
"The consistently low level of credit availed by the private sector together with declining foreign investments are the main factors responsible for a stagnant economy," the SBP said.
SBP's foreign exchange reserves fell to $8.6 billion on Dec. 14 from $10.8 billion end-June and despite an external account surplus, the rupee has depreciated by 3.3 percent since the start of the fiscal 2013 year, the bank said.
The International Monetary Fund forecasts a 3.7 percent growth in Pakistan's economy this year, up from 3.0 percent in 2011.