KARACHI - The State Bank of Pakistan has cut its policy rate by 50 basis points to 10 per cent from 10.5 per cent to encourage private-sector investment.

The new rate would come into effect from 8th October, at the start of the new working week.

The decision to cut the policy rate was taken by the Central Board of Directors of the State Bank at its meeting held under the chairmanship of Governor Yaseen Anwar here Friday.

To strengthen the liquidity management framework, the SBP has also decided to implement certain measures, details of which are being issued separately.

“A consistent deceleration in inflation since May 2012, to 8.8 per cent in September 2012, is more than earlier estimates. Thus, despite an expected uptick in H2-FY13, the overall inflation outlook has improved. In fact, the likelihood of meeting the 9.5 per cent inflation target for FY13 has increased,” the Monetary Policy said, adding that at the macro level, it seems that the effect on inflation of falling private investment demand is becoming more pronounced than the influence of high fiscal borrowings.

“The disaggregate CPI inflation data also shows that this could be a beginning of a broad-based trend. The number of commodities with double digit year-on-year inflation has slightly come down in last few months after an increase over last three years; first in the food group and now in the non-food group as well.”

The decline in 20 per cent trimmed core inflation measure, to 10.4 per cent in September 2012, is slower than the fall in CPI inflation. “This indicates persistence of inflation expectations due to inertial effect of high inflation experienced in the recent past, overall rising trend in fiscal borrowings from the SBP, and depreciation of exchange rate,” it said, adding that the recent fall in inflation together with a retirement of Rs412 billion of fiscal borrowings from SBP during Q1-FY13 could bring down core inflation further by having a beneficial impact on inflation expectations. This would depend, however, on the fiscal authority’s resolve to maintain this trend in the coming quarters, the Monetary Policy observed.

While discussing the previous rate cut announced in August 2012, the Monetary Policy said that a declining inflation together with weak growth in credit to private businesses was the basic context in which SBP reduced its policy rate by 150 bps in August 2012.

“The resumption of monetary easing, in this environment, was necessary to influence the behavior of borrowers in the private sector and scheduled banks to step up efforts to improve their intermediary role,” it said and added that a host of factors needed to be considered for the policy to be sufficiently effective.

“Prominent among these are considerable improvement in the availability of energy and reduction in government’s fiscal borrowing from the banks. The former is expected to facilitate an increase in the demand for credit and the latter would help in improving the supply of credit to the private sector. Further support to SBP’s initiative can come from realisation of expected foreign financial inflows that would alleviate the balance of payment concerns and help in easing the considerable fiscal pressure on domestic borrowings,” it said.