Friday, August 10, 2012

Pakistan cuts rate to spur lending, better inflation outlook

    The central bank of Pakistan cut its policy rate by 150 basis points to 10.5 percent to boost private sector lending amidst an improving inflation outlook, even if it expected consumer prices to exceed the bank's target for the 2013 fiscal year.
    The State Bank of Pakistan (SBP) said the inflation rate eased to 9.6 percent in July from 11.3 percent in June, but this was due to temporary factors, such as lower oil prices and a large cut in administered gas prices. Nevertheless, this "created strong market expectations for a downward revision in SBP's policy rate," the bank said in a statement, adding government bond yields had eased.
    The central bank said it was still too early to conclude that inflation was on a permanent path toward lower rates, forecasting consumer price inflation of 10-11 percent in fiscal 2013, above the 9.5 percent target. However, inflation in fiscal 2012 was within the 12 percent target.

    "In any case, it would be too early to call it an emerging trend as there are still deep-rooted factors driving inflation. Stickiness in both the core inflation measures points towards the persistence of inflation in low double digits," the SBP said, adding:
    "The main reason for this moderation in inflation is a collapse in real private investment, indicating a structurally weak economy. However, it continues to persist in double digits for the fifth consecutive year as there are still deep-rooted factors driving inflation."
    The bank said Pakistan's economy had not been able to achieve an upward trajectory due to falling private investment over the last four years at the same time that inflation remained high.
    "With the economy operating at a level less than its potential level, this creates a policy dilemma. While a negative output gap does provide room for an accommodating monetary policy stance, persistently high inflation at the back of well entrenched inflationary expectations limits such policy maneuver. Breaking out of this rather complex nexus is therefore the real challenge faced by the Pakistan economy in general and SBP in particular," the bank said.
    The SBP last cut its discount rate by 150 basis points to 12 percent in October 2011.


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