KARACHI: The State Bank of Pakistan cut on Tuesday its key policy rate by 50 basis points to 12.5 percent for December and January to spur economic growth, but it remained cautious because of the country’s security situation.

“Striking a balance between monetary and financial stability and real economic activity has become increasingly difficult,” the SBP said in a statement.

The bank cut the key policy rate as inflation eased to a 22-month low of 8.9 percent year-on-year in October, and as various macroeconomic indicators showed improvements.

However, the central bank said it did not cut the rate further as it maintained a cautious approach.

“A close inspection of these encouraging developments together with a pragmatic assessment of prevailing security situation in the country and fiscal uncertainties invite caution and further analysis,” the bank said in a statement.

Economic growth fell to 2 percent in 2008-09, its slowest in eight years.

Pakistan pledged to keep its fiscal deficit at 4.9 percent of gross domestic product in the 2009-10 fiscal year under a deal with the International Monetary Fund.

“A higher than projected fiscal deficit for FY09 has also changed some underlying assumptions for inflation outlook for FY10,” the bank said.

The finance ministry has yet to report figures for the first quarter of this fiscal year but analysts expect the deficit to overshoot the target by 0.3 percent.

Recent month-on-month inflation changes in headline and core measures continue to be volatile and on the higher side, oscillating between 0.5 and 1.7 percent in case of the former and remaining stuck at 0.8 percent in case of the latter. A reassuring fact is that the number of items in the CPI basket showing higher monthly increases relative to a historical benchmark has come down significantly.

The SBP said the poor administration in the supply chain of some food items is not helpful in positively altering inflation expectations.

The SBP said that recovering global economy is expected to revive global trade and flow of liquidity across borders, which bodes well for Pakistan’s exports and private financial flows. The recent strong inflow of workers’ remittances and a substantially improved external current account deficit of $1.1 billion in the first four months of FY10 may allow Pakistan’s economy to absorb the likely swelling of import bill induced by a nascent domestic recovery and higher international oil prices.

The central bank also said the security situation is also a cause for concern. The army is attacking militants in northwestern strongholds and the militants have fought back with bombs in towns and cities, destroying massive numbers of civilians.

Analysts said a 50 basis points cut in the policy rate was expected. “The cut was in line with expectations but it seems that this will be the last change for the current fiscal year,” said Asif Qureshi, director at Invisor Securities Ltd.

Pakistan agreed to a $7.6 billion IMF loan over two years in November last year, the IMF increased this loan by $3.2 billion in July. More than $5 billion has currently been released.

The State Bank of Pakistan kept its rate unchanged at 13 percent on September 29 after a cut in August of 100 basis points.

http://www.dailytimes.com.pk/default.asp...2009_pg5_1