Pakistan Unexpectedly Cuts Key Rate to 10.5% as Inflation Eases

Pakistan cut interest rates by a greater-than-forecast 1.5 percentage points, seeking to bolster faltering growth with the first reduction since 2011 after inflation slowed to a more than two-year low.

The State Bank of Pakistan reduced the discount rate to 10.5 percent from 12 percent, Governor Yaseen Anwar told reporters in Karachi yesterday. None of the eight economists in a Bloomberg News survey predicted the outcome. Four expected a cut to 11.5 percent, two to 11 percent and the rest no change.

Power blackouts and a slide in exports as global growth slows have pressured an economy that needs to repay billions of dollars to the International Monetary Fund. The nation also faces an insurgency on the Afghan border and instability from a clash between the judiciary and the government that contributed to a credit-rating downgrade by Moody’s Investors Service.

“Easing commodity prices and the soft outlook for inflation made this decision likely,” said Ahsan Amir Ali, analyst at ABL Asset Management Co. in Karachi. “But there are still many risks for economic growth. The government may need to apply for a new loan from the IMF soon.”

Pakistan joins a wave of rate cuts in recent weeks from China to Brazil to Europe. Consumer-price growth eased to a 31- month low of 9.6 percent in July, while remaining the fastest after India and Sri Lanka in a basket of 17 Asia-Pacific economies tracked by Bloomberg.

‘Weak Economy’

“Inflation has moderated because of a weak economy,” Anwar said yesterday. “There are still deep-rooted factors driving inflation, but the outlook has improved with a full-year projection of 10.5 percent.”

Risks such as the debt crisis in Europe, a key export market, have sapped demand for Pakistan’s rupee, which is down 8.3 percent against the dollar in the past year.

Moody’s cut Pakistan’s rating deeper into junk status in July, citing falling reserves and political instability. The nation has to repay about $7.5 billion to the IMF from 2012 to 2015, with $1.2 billion of that amount handed over as of June, it said.

The government and the IMF are likely to agree on a new loan program in the next few months, said Mustafa Pasha, a fund manager at BMA Funds Ltd. in Karachi. One obstacle to the rapid provision of aid may be the need to wait for the outcome of the next general election, which is due by early 2013.

“The government is likely to increase political pressure on the SBP to support the economy ahead of next year’s election,” said London-based Sukhy Ubhi, an economist at Capital Economics Ltd. “We have penciled in another 100 basis points of policy loosening this year.”

The administration estimates the economy probably expanded 3.7 percent in the fiscal year ended June 2012. It has a goal of 4.3 percent growth in the 12 months that began July 1, even as power blackouts as long as 18 hours a day hamper businesses.

“The rate cut is encouraging for industry and may trigger expansion and investment plans,” said Lahore-based Inayat Ullah Niazi, chief financial officer at D. G. Khan Cement Co. “I hope inflation continues to cool.”

To contact the reporter on this story: Farhan Sharif in Karachi at fsharif2@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.