KARACHI: The State Bank of Pakistan (SBP) on Saturday decided to reduce its policy rate by 50 basis points to 13.5 per cent with effect from August 01, 2011. This was announced by Yaseen Anwar, Acting Governor SBP while unveiling the Monetary Policy Statement in a press conference at SBP, Karachi.
The key parameter in this assessment is the outlook of inflation that indicates that average inflation in FY12 is expected to remain in line with the announced target, he said, adding that no adjustment in the interest rate would have entailed further tightening of monetary policy in real terms, which is not warranted given the decline in private investment.
He said the government also expressed its commitment to continue with a stance of zero borrowings from SBP in yearly flow terms in FY12, which bodes well for anchoring inflation expectations.
He observed that developments related to expected financial inflows and pattern of government borrowings from scheduled banks will need to be monitored closely to assess potential risks for macroeconomic stability.
The SBP Acting Governor said a relative decline in average CPI inflation compared to earlier projections and a gradual buildup of foreign exchange reserves provide a modicum of macroeconomic stability as the economy begins a new fiscal year.
He noted that expectations of inflation are fairly entrenched in the economy. “Thus, a meaningful reduction in inflation would require consistent and credible implementation of monetary and fiscal policies,” he stressed.
He said acknowledging the persistence of inflation, the government has announced an inflation target of 12 per cent for FY12. The government has also provided in Medium Term Budgetary Framework (MTBF) a desired path of inflation of 9.5 per cent and 8 per cent for subsequent two years.
Conditional on factors such as adjustments in administered prices of electricity and oil and a projected broad money (M2) growth of 15 to 16 per cent, SBPs forecast of average inflation ranges between 11 and 12 per cent during FY12, he added.