KARACHI: The cut of 100 basis points in the interest rate was surprising for many stakeholders as they see money flowing from bank accounts towards equity, property, gold and other markets in the wake of sharp fall in return on deposits.

The State Bank on Saturday cut its policy rate from 8 per cent to 7pc, the lowest in 42 years.

Read: Interest rate slashed to 42-year low of 7pc

Analysts said the immediate impact will result in the low return from the banks. The return on deposits will fall below 6pc since the withholding tax will further reduce the payments for the depositors.

“If the depositors get 5.5pc profit on deposits after deduction of withholding tax and average inflation remains at 4.5pc, the real return to depositors is just 1pc which is no attraction for depositors,” said a senior banker.

Bankers, fund managers and bonds traders, who were expecting a cut of 50bps, said the 100bps decrease has suddenly changed the situation and bonds yields fell immediately.

“It’s unexpected and a big decision,” said S.S. Iqbal, a fund manager. “It will be difficult to maintain it for a longer period since the main inflation, CPI, seems to be rising again, especially in Ramazan.”

Analysts said the cheaper money has great potential to influence the private sector and boost the economic activity, but a comprehensive economic strategy is needed to utilise the banking money.

The biggest hurdle is the government itself which uses the maximum liquidity of banks.

“This rate cut is historic and has brought us into an uncharted territory,” said Faisal Mamsa of Landmark Capital. “It will exert pressure on the fragile fiscal ecosystem. This could be good if benefits of this rate cut are passed on to businesses and consumers, but we don’t have an efficient transmission mechanism.”

The interest rate has been in decline since November 2014, falling from 10pc to 7pc now.

However, the private sector remained idle; in fact, the borrowing from banks sharply fell to Rs161bn during this fiscal year from Rs292bn a year earlier.

While the equity market are sure that cheaper money will land first in this market, property dealers and builders are also hopeful for higher business.

“Real estate is the prime attraction for investors. For the last couple of years the business is picking up pace,” said Ashraf Hameed, a known builder and developer. “The latest interest rate cut will surely divert liquidity from banks to real estate business.”

On the currency market, the US dollar shot up by 30 to 50 paisa to trade as high as Rs104 on Saturday. “The dollar rose but did not go above Rs103.60,” said Malik Bostan, President of Forex Association of Pakistan.

The greenback also strengthened internationally since the euro and the British pound lost about 2pc against the US currency during a week, he said.

Published in Dawn, May 24th, 2015

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