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Pakistan May Refrain From Increasing Main Interest Rate as Inflation Cools
Pakistan’s central bank may keep its benchmark interest rate unchanged for the fourth straight meeting this year as slowing inflation reduces the need to raise borrowing costs.
The State Bank of Pakistan will maintain its discount rate at 12.5 percent, according to all 16 economists and analysts in a Bloomberg News survey. The central bank is due to announce its monetary policy decision at 5 p.m. tomorrow.
Pakistan, which has one of the world’s highest benchmark interest rates, has refrained from joining Asian economies from India to Malaysia in raising borrowing costs even as the region rebounds from last year’s global slump. Inflation slowed in June for a second straight month to 12.69 percent after fuel prices declined, giving policy makers room to focus on supporting an economy hurt by terrorism.
“The easing inflation in the last two months may give reasons to delay the tightening,” said Sayem Ali, an economist at Standard Chartered Pakistan Ltd. in Karachi. “It will be a very difficult decision, as the indicators suggest the need to raise rates, while for growth we need an easing.”
The World Bank said last month South Asian economies including Pakistan need to raise borrowing costs to contain inflation and cut their budget deficits to endure “future shocks” to global growth.
Three Cuts
Pakistan Prime Minister Syed Yousuf Raza Gilani’s government has said the country needs low borrowing costs and foreign aid to support growth and create jobs. At least 650 people have been killed in 25 major terrorist attacks nationwide this year as the military fights Taliban militants in the northwest.
The central bank has kept the benchmark interest rate unchanged this year after cutting it three times in 2009 by a cumulative 2.5 percentage points.
On July 21, Pakistan’s central bank rejected all bids for the sale of investment bonds against offers of 19.1 billion rupees. This indicates the central bank may keep the key rate unchanged, Standard Chartered’s Ali said.
Higher power tariffs in the country may put pressure on inflation in the coming months. Pakistan raised power rates by 7.6 percent on July 1, an increase that took effect retrospectively in April, to meet a condition set by the International Monetary Fund for an $11.3 billion bailout.
“The easing in inflation seems temporary, as the power tariff rise and food prices may increase the pace of price gains,” said Asad Farid, an economist at AKD Securities Ltd. in Karachi. “There will be pressure on the central bank to increase rates later, but the current easing reduces the possibility of change in this review.”
Higher costs may hurt companies including Engro Corp., which has taken more loans to expand its food and power businesses, and D.G. Khan Cement Co., which has borrowed more to increase its production capacity.
Food prices may increase in August as demand rises during the Muslim holy month of Ramadan starting next month.
The South Asian economy is forecast to grow 4.5 percent during the year that started July 1, the fastest pace in three years.
To contact the reporter on this story: Farhan Sharif in Karachi, Pakistan at Fsharif2@bloomberg.net
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