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Market pundits see 100bps cut in policy rate

October 02, 2012

KARACHI, Oct 1: In the current economic scenario, falling inflation rate has generated hope for a further cut in the policy interest rate that may allow greater liquidity to finance investment and growth.

Bankers and analysts expect a cut in the interest rate by 50 to 100 basis points in the next monetary policy to be announced on Oct 5.

Latest data on inflation showed that CPI (consumer price index) for September is 8.79 per cent which is the lowest in the last five years. The previous four years witnessed high inflation, touching 26 per cent mark, and the economy grew slightly above 2.5 per cent.

Analysts doubted that bringing the inflation low at single digit could be a political move in the wake of elections in order to provide some relief to people.

As government has shunned borrowing from the central bank, it is an important element for higher inflation. The entire burden of government borrowing is now on scheduled banks, as Rs324 billion were borrowed by the government from scheduled banks. And an amount of Rs125 billion of the State Bank were retired during the first 70 days of the current fiscal year.

“We expect 50 to 100 basis points cut in the discount rate led by falling inflation, better current account position and reduction of government borrowing from the central bank,” said Mohammad Sohail, Chief Executive of Topline Research.

The previous fiscal year witnessed a current account deficit of $4.634 billion which put pressure on economy while the government failed to meet the gap despite massive inflow of remittances that rose to $13 billion.

The business community believes that low interest rate would help reduce lending rates and encourage them to borrow money through banks. High lending rates increased defaults that ultimately convinced banks to invest in government papers instead of advancing to risky the private sector.

The State Bank has reduced discount rate by 350 basis points since July 2011 but the business community said that lowering of discount rate did not impact lending rates as it remained high due to higher risk, investment opportunity and liquidity crunch in the banking system. The business community and analysts believe that inflation is coming down owing to government policy, mainly due to general elections in the next six months.

“Political motives ahead of elections to provide short-term stimulus to the economy cannot be ruled out,” said Sohail.

Nishat Ahmed, a businessman of electronics goods, said there was a huge trust deficit.

“Despite good steps for lowering of inflation, we see it as an interim move for a short term relief to people. It could be reversed after elections,” he said.