KARACHI, Aug 10: The business community on Friday welcomed the State Bank’s decision to lower its key policy rate by 150 basis points but economists remained cautious amid persisting risks to the external sector.

The central bank announced a decrease in its benchmark policy rate to 10.5 per cent from 12 per cent, for the subsequent two months, compared with analysts’ expectations of up to 100 basis points.

This was the first cut since Oct 2011, when the SBP reduced the rate by 150 basis points to 12 per cent.

Kamran Mirza, CEO of Pakistan Business Council, talking to Dawn said the decision by itself is good thing, but it should be part of a scheme of things, such as resolving the energy crisis, curtailing the budget deficit and improving the law and order situation. The rate cut alone will have a marginal impact towards the growth of the economy.”

Fazal Kadir Khan Sherani, President Federation of Pakistan Chambers of Commerce & Industry, appreciated the decision but said the business community’s demand remains to bring the policy rate to single digit.President of American Business Council Saad Amanullah Khan while analysing the decision said: “it is a welcome step for the private sector and especially for SMEs. It will expand private sector credit and drive much-needed investment at a time when industries are struggling with energy and law and order issues.”

On the other hand, he added, it is critical that this expansionary policy must keep a close tab on curtailing inflation as people have faced over 13 to 14 quarters of double digits inflation and are under a lot of pricing and affordability pressure.

While Mohammad Sohail, CEO Topline Securities Ltd, said the higher than market expectation cut in policy rate suggested that the central bank believed that the inflation would remain lower and in order to attract fresh private investment, this aggressive stance was required.

However some analysts debated whether the State Bank should have adopted a wait-and-see approach, rather than cutting lending cost by massive 150bps.

Asif Qureshi, Director at Optimus Capital Management Ltd, said that the aggressive rate cut was based on SBP’s relatively sanguine forecast for inflation and current account for FY13.

It may be too early to call whether the SBP has jumped the gun or exercised incredible sagacity as its forecasts are centered around a weaker international oil price scenario and realisation of government’s external receipts both of which are inherently unpredictable, he remarked.

However, infrequent but large rate moves in a regime of bi-monthly monetary policy reviews seem opportunistic.

Former economic adviser to the government and ECO Macroeconomic Insights, Sakib Sherani, was disappointed with SBP’s rate cut. He said: “It seems that the SBP is declaring victory on inflation prematurely as there are still concerns on balance of payments, which the SBP highlighted. There are also structural issues which cannot be addressed by anti cyclical measures. Interest rates or lowering of interest rates is not going to address structural issues, and until you don’t address that, the economy won’t be able to move forward.”

Our reporter adds from Lahore: Mohsin Aziz, Chairman All Pakistan Textile Mills Association (Aptma) said: “Our efforts have finally paid off. And we are hopeful that the bank will continue to decrease the interest rates to 7 per cent over the next few months.”

Gohar Ejaz, former president of Aptma, said interest rates had to be cut down to 7.5 per cent for stimulating economic growth and creating jobs. The high cost of borrowing has not only failed to control but also discouraged investors and industrialists, resulting in an economic slowdown, unemployment and export losses.