KARACHI: The State Bank of Pakistan, in a surprise move on Friday, cut its key policy rate by 150 basis points to 10.5 per cent for two months amid an improved projection of inflation for 2012-13 and aimed at encouraging private investment.

This exceeded expectations as analysts polled by Dawn earlier this week projected either the policy rate to remain flat at 12 per cent or a cut of up to 100 basis points.

The business community largely welcomed the decision and expressed the hope that it would play a role in containing the intensity of energy crisis and reducing fiscal deficit.

State Bank Governor Yaseen Anwar, unveiling the first monetary policy for the current fiscal year at a press conference, said the outlook for inflation had improved with a projection of 10.5 per cent for FY13 and loans to private sector businesses had sharply decreased.

“The central board of directors of SBP has decided to give a relatively high weight to the state of private sector and investment in the economy,” Yaseen Anwar said.

The CPI inflation rose to 9.6 per cent last month, the lowest since Dec 2004 and fell 0.2 per cent on a month-on-month basis.

Private investment contracted for the fourth consecutive year, standing at 13 per cent, while total investment fell to 12.5 per cent of GDP in FY12 — not a good omen for the economy.

The State Bank took comfort in the receipt of $1.12 billion out of the Coalition Support Funds from the US last week. It is now banking on receipt from the much delayed auction proceeds of 3G licences. The central bank estimates that the money will reduce the current account deficit to $2.5 billion, or one per cent of GDP.

Remittances have also been rising as overseas Pakistani workers sent home a record amount of $13.2 billion, a growth of 17.73 per cent in 2011-12 over the previous year. Mr Anwar said provisional figures suggested $1.2 billion was remitted last month.

ENERGY CRISIS AND FISCAL WEAKNESS: The State Bank governor, however, tempered his optimism with a note of caution: “The impact of the monetary policy has become limited,” as a looming energy crisis and weak fiscal fundamentals were the main reasons for high inflation and low growth.

Fiscal borrowings from the banking sector grew by 50 per cent in 2011-12 and contributed 67 per cent to the overall rise of 14.1 per cent in M2 (currency in circulation), according to SBP.

However, Mr Anwar said the government had retired Rs198 billion last month, indicating that “the fiscal authority is beginning to make efforts to reduce its borrowings from SBP”.

Fiscal deficit in FY12, according to SBP, has been estimated at 6.4 per cent of GDP, excluding 1.9 per cent debt consolidation of power and food sector arrears, which is a considerable slippage and “concerted efforts to bridge the gap between revenue and expenditures through structural reforms are necessary to bring monetary stability and economic growth on sustainable basis”, said the State Bank governor.

The SBP has projected that growth rate would remain between three and four per cent in 2012-13 - well below the target of 4.3 per cent and the country’s economic potential.

The central bank last cut its policy rate by 150 basis points to 12 per cent in Oct 2011 and kept it unchanged in the previous four monetary policy statements.