SBP likely to cut policy rate by 0.5-1pc

LAHORE - The State Bank of Pakistan is due to announce its monetary policy on Saturday (today) for the subsequent two months. This will be the first monetary policy after Pakistan quit the IMF programme and the financial experts are forecasting a 50-100bps cut in the interest rates as external pressure on the central bank has reduced regarding formulation of economic policies especially the monetary policy, as the government has quit the IMF programme. The economic headwinds and challenges are increasing and do not allow a congenial environment for massive easing in monetary policy. However, one can claim that easing inflation and somewhat contained external account have created a room for policy easing of at least 50bps, said Muzzammil Aslam, a financial expert. The State Bank of Pakistans (SBP) Monetary Policy Committee is scheduled to meet today to devise the policy stance for 2QFY12. This will be the first meeting after the government opted not to abide by the IMF programme which expired on September 30. Since SBPs last revision of the policy rate by -50bps to 13.5 percent on July 29, the balance of risk has further elevated the probability of massive policy easing - reflected from 10-year bond yields. Experts believe that easing inflationary concern, dwindling private credit offtake, lower advances to deposits, contained government borrowing from the SBP, and global recessionary woes leading to lower oil prices are the reasons which can lead to cut in interest rate. However, the arguments that favour policy inaction included limited external funding available for budgetary finance, re-payment of IMF debts and little progress on raising tax-to-GDP ratio & eliminating subsidies by the government. Taking cue from history, the SBP during November 2002 - April 2005 had kept the DR rate unchanged at 7.5 percent, however, the 1-year T-bill yields fell from a high of 6.99 percent to a low of 1.99 percent. Experts said that CPI in 1QFY12 came in at 11.47 percent, down from 13.36 percent of a year earlier. The reason for decline in inflation is primarily attributed to the change in base year and the methodology. However, experts believe the inflationary expectations are also easing on the back of a slowdown in consumption and decline in global commodity prices. We (experts) believe inflation projection by the SBP for FY12 will play a key role in the upcoming SBP policy rate decision. Private credit off-take growth has remained relatively slow when compared to inflation during the past two years. The advances for schedule banks have increased merely by 6 percent (in FY11) and 4.5 percent (in FY10) compared to the CPI of 13.66 percent & 10.10 percent, respectively. This is alarming as lower investments points towards lower prospect of growth in the years to follow. Lower advances to deposit ratio have fallen to dismal level of 63.5 percent in August 2011 compared to 72 percent in the corresponding period last year. Preference for safety and lower demand for credit are the prime reasons behind significant fall in this ratio, in our view. Interestingly, the government borrowing from the SBP is still under control at Rs1,200b as of Sept 17, 2011, corresponding the same level as of June 30, 2010. The discipline in borrowing thus far has played a pivotal role in containing the inflationary expectation. Slow reforms on the tax & power front are likely to again raise the risk of higher fiscal deficit in FY12. The government has projected a deficit of 4 percent of GDP in FY12; however, lower tax collections, higher subsidies and lower provincial surplus can see the deficit projection going overboard and be recorded at near 6 percent - meaning Rs1.25trn would be needed for funding. Meanwhile, the APTMA has demanded 6.5 percent cut in interest rate as the regional competitors including India, Sri Lanka, Bangladesh and China have responded to the global cotton crisis through devising different support measures for their textile industries. It urged the policymakers to realize the fact that inflation cannot be exported to the US and the EU markets offering below 1 per cent policy interest rate to industrial sector since last three years. He said that just 0.5 or 1 percent cut in markup rate in the coming monetary policy will do no benefit to the industry. It said that the government should not force its exporting industry to bankruptcy because of wrong policy and bring interest rates down to 7.5 per cent. The Lahore Chamber of Commerce and Industry Friday said that 250 to 300bps cut in policy rate is direly needed to jumpstart the economy which is at standstill and to revive the industry. LCCI President Irfan Qaiser Sheikh said that a cut of 50 to 100 basis points would not be doing any service to the dwindling economy. He said that it was very unfortunate that we have failed to learn any lesson from the tighter monetary policy stance adopted by the State bank of Pakistan in the yester years.

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