LAHORE - Encouraged by softening inflation, the State Bank is likely to cut the benchmark interest rate by 50 basis points to 9 per cent from 9.5 per cent in its upcoming monetary policy for the subsequent two months on January 24 (Saturday).
Analysts expect the central bank to cut its key policy rate by at least 50 basis points after a 45 per cent fall in global crude prices since July has brought inflation down. The headline inflation, measured by the consumer price index, was recorded at 4.3 per cent in December 2014 as compared to 3.96 per cent in the previous month and 9.2 per cent in December 2013.
The SBP reduced its key policy rate by 0.5 per cent to 9.5 per cent in its last policy review in November 2014. Favourable trends in global commodity prices, lower inflation and limited damage from recent floods were the main reasons behind the decision. However, industry circles are of the view that at least 150 basis points cut in policy rate is direly needed to jump-start the trade and economic activities as the existing 9.5 per cent discount rate is not compatible with the inflation rate. All Pakistan Textile Mills Association former chairman and group leader Gohar Ijaz said the last reduction of 0.5 per cent in the interest rate by the State Bank of Pakistan (SBP) did no service to the economy and industry.
Comparatively, policy rate in China is 5.60 per cent, in India 7.75 per cent, Bangladesh 7.25 per cent, Sri Lanka 6.5 per cent, Singapore 0.12 per cent and Thailand 2 percent. He said high policy rate is one of the biggest reasons of high input cost of the industrial sector. Resultantly, Pakistani merchandise is facing hard competition in the international market.
He said that ongoing economic scenario shows there is hardly any time left for economic managers and they all should understand well that industry and economy needs minimum 1.5 to 2 percent cut in the discount rates,” he added. Gohar added that it is very unfortunate that we have failed to learn any lesson from the tighter monetary policy stance adopted by the SBP in the past.
APTMA chairman SM Tanveer said that high discount rate is no more sustainable. It is causing great harm to the economy and will continue to do so unless a realistic approach is adopted.
He said that despite higher inflation, all the major economies have either curtailed or are in the process of reducing high interest rates to protect their economies while countries like Japan and Sweden are maintaining discount rate at zero. He asked the SBP to understand that its continued tighter stance is inflicting a very heavy loss on the nation as the economy has already paid a very high price because of high interest rate.
Reserve Bank of India has also reduced its policy rate a fortnight ahead of the scheduled date of monetary policy announcement on February 3 and another cut is also expected during monetary policy announcement.
It has been decided to reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 8 per cent to 7.75 per cent with immediate effect, Reserve Bank said.
All Pakistan Cement Manufacturers Association chairman Muhammad Ali Tabba said present government was benefited by a 44 per cent fall in global crude prices since July which has brought inflation down, lowered the import bill and reduced government spending on food subsidies.
He said weak international oil prices and flagging export demand have prompted neighboring economies including India to take aggressive action to ease monetary policy.   He said that SBP should also follow the suit and continue gradual policy of reducing benchmark interest rate to encourage high economic growth needed for maximum employment generation in the country.