Pakistan May Cut Rates to Spur Growth Weakened by Terrorism
Pakistan’s central bank may cut interest rates for a second straight meeting, seeking to revive growth in an economy battered by terrorism and floods.
The State Bank of Pakistan will lower the discount rate to 12.5 percent from 13.5, three of 5 economists in a Bloomberg News survey said. The rest predicted a reduction of half a percentage point before the announcement in Karachi tomorrow.
A 2 percentage point drop in Pakistan’s inflation rate in the past three months offers Acting Governor Yaseen Anwar scope to join emerging markets from Russia to Brazil in lowering borrowing costs as growth falters in developed nations. A rate cut might help shore up growth prospects in an economy that’s seen growing less than half the pace of fellow South Asian nations India, Bangladesh and Sri Lanka this year.
“Slowing inflation and a cut in government borrowing from the central bank have built a strong case for an economic stimulus,” Mustafa Pasha who manages the equivalent of $50 million in bonds as a fund manager at BMA Funds Ltd. in Karachi, said before the rate announcement. “Investors are pricing in an aggressive action in the next meeting.”
The Karachi Stock Exchange 100 Index, which has declined 1.5 percent since the start of this year, was little changed at 10:44 a.m. local time. Pakistan’s 10-year government bond yields are trading at 12.6 percent, the highest level after Greece and Venezuela, according to data compiled by Bloomberg.
The Pakistan rupee has weakened 1.7 percent this year and dropped to a record low on Sept. 16, prompting the central bank last month to conduct what it called a “calibrated intervention” to stabilize the currency. The rupee dropped 0.1 percent to 87.25 against the dollar today.
A weakening currency will increase import costs and stoke inflationary pressures, limiting the room for the central bank to ease its monetary policy aggressively, said Sayem Ali, a Karachi-based economist at Standard Chartered Plc.
Consumer prices rose 10.46 percent in September from a year earlier, after climbing 12.43 percent in July, according to the Federal Bureau of Statistics.
Prime Minister Yousuf Raza Gilani’s government named Anwar, a deputy governor since March 2007, as the central bank’s acting chief after Shahid Kardar quit on July 12. Anwar unexpectedly cut rates in the last policy decision on July 30, almost three weeks after Kardar resigned blaming state spending for fanning prices.
Anwar cited the government’s commitment to “zero borrowings” from the central bank as one of the reasons for reducing rates. The federal government paid back 33 billion rupees ($380 million) to the central bank this fiscal year against 238 billion rupees borrowing in the same period a year ago, according to the central bank.
Policy makers in Pakistan are aiming to boost economic growth to 4.2 percent in the fiscal year ending June 30, from 2.4 percent in the previous year, one of the lowest expansions in the past decade, as the country struggled to cope with floods and militant attacks.
Floods in August forced more than one million people from their homes and damaged crops in parts of southern Pakistan still recovering from last year’s worst ever monsoon inundations that devastated the region.
Terror attacks in the South Asian nation have killed at least 35,000 people since 2006, according to government estimates.
Foreign direct investment in Pakistan fell 40 percent to $112.4 million in the first two months of the fiscal year that started July 1 from a year earlier. By contrast, India, from which Pakistan was partitioned in 1947 following independence from British rule, got $13.4 billion in the three months through June, a quarterly record.
As Pakistan’s relations with the U.S., its biggest donor, frayed since Navy Seals killed al-Qaeda leader Osama bin Laden in a unilateral raid on May 2, China has emerged as a key ally, according to Saleem H. Mandviwalla, the chairman of the government’s Board of Investment.
“Pakistani companies badly need a cut in interest rates,” said Saad Khan, an economist at Arif Habib Ltd., in Karachi. “A clear indication from the central bank that it’s on a rate cutting path will help support new investment and expansion.”
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