KARACHI: A further fall in inflation in August has created space for more cut in the interest rate which is already at a decade-low level.

Consumer Price Index (CPI) fell to 1.7 per cent in August against 1.8pc in July, reflecting that the trend may prevail.

Experts see another cut in the interest rate in the next monetary policy which is expected to be announced by the end of this month.

In the previous monetary policy, the rate was kept unchanged — 6.5pc target rate and 7pc upper ceiling.

In the first monetary policy of this fiscal year, the State Bank had stated that it was expecting higher monetary expansion. The inflation target for this fiscal year is 8pc, while the State Bank believes it would be lower than the government projection.

However, analysts see much lower inflation in the fiscal year, and the government may force the State Bank to further cut the interest rate.

Due to falling inflation, real interest rate further increased to 5.9pc in August from 5.2pc in July. Low inflation and expectation of a further cut in the interest rate may accelerate private sector credit off-take.

A report issued by the State Bank on Tuesday showed that during the first 50 days of this fiscal year, private sector did not borrow.

The SBP reported net debt retirement of Rs94bn by the private sector during the first 50 days of 2015-16 as against the Rs68bn retired in the same period last year.

Despite a steep fall in the interest rate, particularly in the second half of the previous fiscal year, the private sector credit off-take did not see a rise.

In fact, private sector borrowing fell in 2014-15 as it remained limited to Rs208bn compared to Rs371bn in the preceding year.

While announcing the monetary policy in July, the State Bank governor had stated that inflation may remain on the lower side in view of recent behaviour of CPI inflation amid falling international oil prices.

However, recent developments resulted into devaluation of local currency which may push the inflation on the higher side. The purchasing capacity of the local currency has started falling as rupee lost about 3pc against the US dollar in a month.

“Sharp rupee depreciation and a further hike in gas tariffs could result in higher than anticipated inflation,” said a researcher of Topline Securities.

Analysts believe that there could have been a bigger decline in the main inflation had the government passed the entire impact of low oil prices in the international market. The oil earlier fell to $40 a barrel.

Published in Dawn, September 2nd, 2015

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