RIZWAN BHATTI
KARACHI (November 18 2009): The State Bank of Pakistan (SBP) is likely to cut policy rate by 50-100 basis points (bps) as the inflation has shrunk to single digit after a gap of 22 months, sources in the banking industry told Business Recorder on Tuesday. They said the declining trend in inflation and positive economic indicators have made room for the central bank to cut the policy rate and give a breathing space to the country's ailing economy.

The central bank is going to review the monetary policy for two months (November-December 2009) during next week. Although, the sources are not sure about the exact percentage of the reduction, however they are confident that the SBP will cut the interest rate in the upcoming monetary policy.

"The SBP would ease the monetary policy as the inflationary pressure has substantially reduced and the time has come to provide some relief to the depressed economy," they said. However, they said the central board of directors of the SBP would take a final decision on policy rate in its meeting schedule to be held at SBP head office on November 24, 2009.

The State Bank has constituted a nine-member Monetary Policy Committee (MPC), which will start deliberations this month, they said and added that upon its recommendations, the central bank board would take a decision on the policy rate. To harmonise the constitution of the MPC with the legal framework of the SBP and make it fully independent, amendments to the SBP Act have already been submitted for the legislative process. Until their enactment, the MPC will seek approval of its recommendations from the Board of Directors of the SBP.

The committee would review the impact of tight monetary policy, inflation statistics, monetary aggregates and other inflationary tools, besides overall economic situation to finalise the recommendations. In view of sharp decline in inflation and rising trend in the forex reserves, bankers and economists expect that the SBP will cut interest rate by some 50-100 bps in the next monetary policy.

Inflation has eased from record high of 25 percent in October 2008 to single digit 8.87 percent in October 2009 after a gap of 22 months. "We are hopeful there would be better option of some reduction in the interest rate after reviewing the last two months' inflation statistics and economic situation," analysts said.

They said the country's forex reserves have also mounted to a better position of some 14 billion dollars in November 2009 from 6.5 billion dollars in November 2008, besides some reduction in the government budgetary borrowing. The country's current account deficit has also posted a decline of 89 percent to 462 million dollars in the first quarter of current fiscal year, mainly due to rising remittances and sharp decline in the trade deficit, they added.

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