KARACHI: The State Bank of Pakistan slashed on Saturday the interest rate by 50 basis points to eight per cent.

It cited a number of positive economic indicators to justify the third consecutive policy rate cut since November last year.

Read: Interest rate cut by 100 basis points

In its bi-monthly monetary policy statement, the central bank said: “Increasing numbers of economic indicators in the current fiscal year have moved in a favourable direction. Headline CPI inflation continues to follow a downward trajectory and is expected to be well below the annual target of 8 per cent.”

The latest SBP projection range is 4-5pc for average CPI inflation in 2014-15.

As per the recent trend, the fall in inflation was broad-based with food and non-food inflations receding, both the measures of core inflation, non-food non-energy and trim-mean, were also recording decline, the bank said.

Also read: SBP reduces interest rate by 50bps

“However, due to current decline in inflation in general and commodity prices in particular, there could be an increase in aggregate demand which may have inflationary repercussions beyond FY15.”

The SBP said the GDP growth was on course to surpass the FY14 outcome. The government’s efforts to contain the fiscal deficit had been on track in the first half of FY15, despite slightly slower growth in revenue collection, it added.

It said the current macroeconomic stabilisation had thus opened a window of opportunity to gear up reforms to ensure improvements in the economy.

“Owing to recent foreign exchange inflows and lower oil price, external sector outlook continues to improve.”

The bank said that after growing by 2.2pc in July-Jan FY15, large-scale manufacturing was likely to gain traction due to recent cut in policy rate and low prices of raw materials that could boost the manufacturing sector.

“Growth in credit to private sector during July-Feb FY15 has also remained subdued at Rs158.9 billion compared to Rs298.3bn in the same period of FY14. Thus, these monetary indicators have largely reflected the underlying trends in falling inflation,” the SBP said.

With strong workers’ remittances and declining import growth, current account deficit has shrunk in July-Feb FY15 as compared to the same period last year.

“The improvement is in spite of subdued exports performance. With lower price impact in imports and multilateral inflows on track, the external sector outlook remains stable.”

This is most visible in the stability in foreign exchange market and in an upward trajectory in foreign exchange reserves, the bank said.

In the agriculture sector, improved outcomes in major kharif crops (cotton and rice, in particular) and incentives in place along with favourable weather conditions for rabi season wheat crop, GDP growth is expected to be higher than that of FY14, it said.

Published in Dawn, March 22nd, 2015

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