(MENAFN- Khaleej Times) Pakistan cut its benchmark interest rate for a second meeting to support a faltering economy after inflation eased to the lowest level in almost three years.
The State Bank of Pakistan lowered the discount rate to 10 per cent from 10.5 per cent, spokesman Syed Wasimuddin told reporters in Karachi on Friday. Eight of 16 economists in a Bloomberg News survey predicted the decision. One expected no change, another a reduction to 9.75 per cent, five a move to 9.5 per cent and one a cut to 9 per cent.
Power blackouts, an insurgency on the Afghan border and a drop in exports amid faltering global growth have added to the case for steps to support expansion. The central bank's move comes after inflation cooled to 8.79 per cent last month, the lowest level since December 2009, and adds to a 1.5 percentage point reduction in borrowing costs in August.
"This is the last discount rate cut for the year as inflation is likely to jump to double digits in the coming months due to increasing oil prices," Umer Pervez, head of research at Shajar Capital Pakistan in Karachi, said before the decision.
Pakistan's rupee has weakened about 8.6 per cent against the dollar in the past year, hurt by risks including a current account gap, while the Karachi Stock Exchange 100 Index is up 33 per cent after companies such as banks reported higher profits.
Today's rate cut is a 'populist decision' ahead of a general election due by early 2013, said Farrah Marwat, head of Research at JS Global Capital in Karachi.
Pakistan needs to repay billions of dollars to the International Monetary Fund, signalling pressure on foreign reserves. A partially disbursed, $11.3 billion IMF loan programme expired in September 2011.
The nation hasn't requested a fresh loan, Jeffrey Franks, the IMF's mission chief to Pakistan, said at a briefing in Islamabad on October 3.
Inflation may rise to double digits by mid-2013 unless monetary financing of the budget deficit is reversed, and the shortfall may exceed the government's target for this fiscal year, Franks said in a statement late yesterday.
The administration's goal is a gap of 4.7 per cent of gross domestic product in the year that began July 1.
Pakistan has to repay about $7.5 billion to the Washington-based lender from 2012 to 2015, with $1.2 billion of that amount handed over as of June, Moody's Investors Service said in July, when it cut Pakistan's credit rating deeper into junk status on falling reserves and political instability.
Pakistan's government has a goal of 4.3 per cent economic growth in the year ending June, even as power blackouts as long as 18 hours a day hamper businesses.
The IMF estimates GDP will rise three per cent to 3.5 per cent this financial year. The nation needs faster growth to absorb an expanding workforce, according to the multilateral body.
The latest rate cut may not spur lending, a pattern evident after August's reduction, said Ayaz Mahmood, the chief financial officer of Honda Atlas Cars Pakistan Ltd. in Lahore.
"People are just not ready to borrow amid the energy shortage," he said.
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