Pakistan May Lower Key Rate for Second Time This Year
Pakistan’s central bank will probably lower its benchmark interest rate for the second time this year to help boost economic growth.
State Bank of Pakistan will cut its discount rate to 12.5 percent from 14 percent, according to six of 13 economists in a Bloomberg News survey. Six expect the rate to be reduced by 1 percentage point, while one predicts a 2 percentage-point cut.
“In view of the economic slowdown, slashing interest rates is inevitable,” said Muzzammil Aslam, senior economist at JS Global Capital Ltd. in Karachi. “If economic activity doesn’t pick up now, it will be difficult for the government to meet its macro targets for this year.”
The Pakistan Peoples Party-led government is betting lower interest rates will revive the confidence of investors, who have shied away from the country because of poor security, militancy in the northwest region and a crumbling economy. The South Asian nation was forced to seek a $7.6 billion bailout from the International Monetary Fund in November and may require an additional $4 billion from the Washington-based lender.
Governor Salim Raza is due to release the central bank’s quarterly monetary policy statement on August 15 in Karachi, after the announcement was today delayed from the previously scheduled date of July 25. Raza in April cut the benchmark rate one percentage point to 14 percent from a decade high.
Slowing Inflation
Policy makers last raised borrowing costs by 2 percentage points on Nov. 12, the fourth increase in 2008, as part of conditions for the IMF loan and to curb inflation that reached a 30-year high.
Consumer prices rose 13.13 percent in June from a year earlier, the slowest pace in 16 months. Easing inflation gives the central bank room to cut interest rates, Aslam said.
South Asia’s second-largest economy was forced to turn to the IMF for a rescue package in November to avoid defaulting on its debt, after the country’s foreign-exchange reserves shrunk 75 percent in a year to $3 life insurance.5 billion and the current-account deficit widened to a record.
“The twin deficits of the current account and budget are under control so there is no reason the central bank shouldn’t reduce interest rates,” said Asif Ali Qureshi, head of research at Invisor Securities Ltd. in Karachi. “Still, lowering rates may not trigger economic activity as investors are concerned about political instability and governance.”
Terrorist Attacks
Pakistan’s economy has been deteriorating over the past two years as rivalry between President Asif Ali Zardari and Nawaz Sharif, the leader of the biggest opposition party, over presidential powers have prevented the government from tackling slowing growth and worsening security. The global recession has eroded exports and investment and Taliban insurgents have launched terrorist attacks in response to an intensified military campaign against extremists.
The $146 billion economy may expand as little as 0.8 percent in the fiscal year to June 2010, according to HSBC Holdings Plc, the weakest pace since 1952. The government estimates growth of 3.3 percent.
The central bank’s key interest rate may reach 10 percent by the end of this fiscal year, according to Mustafa Pasha, an economist at BMA Capital Management Ltd. in Karachi.
“Continued inflationary pressures, a weakening rupee and IMF pressure is likely to keep the central bank conservative with regards to monetary easing,” he said.