KARACHI: The State Bank of Pakistan on Saturday slashed the policy interest rate by 25 basis points to a 40-year low — from six per cent to 5.75pc — in view of its assessment that inflation would remain below the target set for the 2016 financial year.

The policy rate was previously cut by 50 basis points to 6pc in September 2015 and since then the central bank has been maintaining it.

Trade and industry representatives, however, believe that the cut in policy rate alone could not improve the country’s economic growth as the government should take subsequent measures to facilitate the manufacturing sector.

In its monetary policy statement, the central bank said that the country would not achieve its GDP growth target of 5.5pc for the financial year ending on June 30, but it would exceed its last year’s outcome of 4.2pc.

“Headline Consumer Price Index (CPI) inflation, despite its continuous increase on a year-on-year basis, would remain below its FY16 annual average target of six per cent,” it added.

It said that the inflation outlook for FY16 was “low”, although the headline CPI inflation sustained its rising trend for the seventh consecutive month and rose to 4.2pc in April 2016 from the low of 1.3pc in September 2015.

While the bank said that expansion in industrial activities and services sector would salvage some of the lost momentum to GDP growth due to the losses from cotton and rice crops, it warned that uncertainty might arise if there was an adverse change in oil prices or workers remittances.

The SBP also said that inflation was likely to attain a higher plateau in the next financial year, as rising global oil prices, imposition of new taxation measures and increase in electricity and gas tariffs would put upward pressure on CPI inflation.

It said that recovery in large-scale manufacturing, which grew by 4.7pc during Jul-Mar FY16 compared to 2.8pc in Jul-Mar FY15, was expected to continue further on account of improving energy and security conditions.

“Buoyant growth in construction and improved demand for consumer durables has persistently indicated revival in domestic demand in the current fiscal year. This is also reflected in uptake in credit to the private sector which increased by Rs314.7 billion during Jul-Mar FY16 compared to Rs206bn during the same period of FY15,” said the central bank.

However, Karachi Chamber of Commerce and Industry President Younus Bashir observed that the real benefit of the historic low interest rate could not be reaped until the government took certain measures for a sustainable industrial growth.

Welcoming the SBP’s move, he said: “Despite a low interest rate of six per cent the borrowing of our manufacturing sector was low and our exports are declining.”

He said that the cost of doing business that included power and gas tariffs in Pakistan was much higher compared to Bangladesh, India, Vietnam and other emerging economies.

He said that under current circumstances the housing and property sector would be the real beneficiary of the low interest rate.

Topline Securities CEO Muhammad Sohail told Dawn that the cut in policy rate was not a very “shocking” decision.

“In the last meeting of the SBP’s monetary policy committee five members were in favour of reduction and five wanted to keep the interest rate unchanged,” he said.

He said that although commodity prices were increasing, inflation was still low and, therefore, the central bank decided to cut the interest rate before the end of the current financial year.

He said that the central bank might cut the interest rate by another 25 basis points. “We think there is still a room of 25 basis points.”

Published in Dawn, May 22nd, 2016