KARACHI: The State Bank of Pakistan (SBP) yesterday reduced interest rate to a 42-year-low of six per cent. In its bimonthly monetary policy statement, the SBP slashed the interest rate by 50 basis points to 6 per cent from 6.5pc. The bank said, “Inflation came down to 3.6 percent in July-August from 8.4 percent in the same period last year due to falling fuel and food prices.”

The SBP added the Pakistan economy would receive a boost from infrastructure projects such as the planned China Pakistan Economic Corridor (CPEC).

“Therefore, there is anticipation of higher economic activity in (fiscal year) FY2015-16 which is expected to boost credit uptake,” the bank said.

The monetary policy decision observed, “With better law and order situation, investor and consumer confidence is improving. After recording a growth of 3.3 per cent, large-scale manufacturing is expected to gain further traction at the back of improvement in energy supplies.” The SBP said, “Implementation of infrastructure development and energy projects under China Pakistan Economic Corridor would further enhance the improving investment environment. Therefore, there is anticipation of higher economic activity in FY16 which is expected to boost credit uptake.”

Other indicators, such as core inflation measures, have also decreased in August 2015. Major sources of declining inflation are favorable supply shocks and demand management policies. The current deceleration owes much to the smooth supply of the perishable food items and falling international oil price pass-through to consumer prices, it noted.

The bank said, “Continuation of current trends along with moderate pick up in aggregate demand would largely determine the path of inflation in FY16. Recent increases in natural and compressed natural gas prices and their likely second round impacts would be offset by lower global oil price that has yet to find the bottom.”