KARACHI: State Bank of Pakistan on Friday cut its benchmark interest rate from 10.5 percent to 10 percent in an effort to encourage private-sector investment.

The governor of the central State Bank of Pakistan, Yaseen Anwar, said the new rate would come into effect on Monday, at the start of the new working week.

It comes one day after the International Monetary Fund (IMF) said that Pakistan's economic situation was worsening and that it faces a return to double-digit inflation as the government prints money to finance its deficit.

In a mission report, the IMF said Islamabad urgently needed to address deep problems in its energy sector, including costly subsidies and poor distribution, while boosting growth to meet a rapidly growing population.

Anwar said the overall outlook for inflation has improved and that the changes of meeting the target rate of 9.5 percent this fiscal year had increased.

The bank promised to continue encouraging the private sector, but called for improved energy supplies and a reduction in government borrowing.

“The two steps would facilitate an increase in the demand for credit and improve the supply of credit to private sector.”Anwar said weak foreign financial inflows were the main challenge faced by the balance of payment position.

The central bank has now slashed its benchmark interest rate by 200 basis points, down to 10 percent, since August.