KARACHI: Pakistan's central bank cut its key policy rate by 50 basis points to 9 per cent on Friday, saying the need to revive a sluggish economy outweighed concerns about the country's balance of payments and upside risks to inflation.
“(The) State Bank of Pakistan has decided to place a higher weight to declining inflation and low private sector credit relative to risks to the balance of payments position,” the bank said in a statement.
Hikes in electricity prices and a higher general sales tax rate introduced by the new government elected in April could push inflation higher again, the bank said.
Pakistan's foreign reserves have dwindled in recent months to $6.2 billion on June 14, and the country is facing a punishing schedule of repayments to the International Monetary Fund, putting pressure on the rupee and raising concerns of a full-scale payments crisis.
An IMF team is visiting Pakistan, and the government may soon be obliged to request a further bailout loan.
The State Bank of Pakistan cited inflation that touched its lowest level since 2009 in May and positive sentiment following the election of the new government as factors potentially attracting currency inflows that could offset the negative impact of lower interest rates on attracting overseas money.
Despite these issues, the need to spur domestic investment to revive the economy was paramount, the bank said.
Pakistan's economy grew 3.6 percent in the last fiscal year, below a target of 4.3 percent.
Chronic gas and electricity shortages, violent crime and a Taliban insurgency have all hampered growth and contributed to falling foreign investment.