With most economic indicators justifying monetary easing in the next policy announcement, a majority of analysts expect the State Bank of Pakistan (SBP) to reduce the discount rate by at least 50 basis points.
SBP Governor Ashraf Mahmood Wathra will read the monetary policy statement at a press conference on January 24, according to the central bank’s spokesperson. The discount rate is the principal monetary policy tool that the central bank uses to control money supply in the economy.
After keeping it flat at 10% from November 2013 to November 2014, the SBP decreased the discount rate by 50 basis points to 9.5% at its last monetary policy announcement.
Reviewed every two months, it is the interest rate at which commercial banks are allowed to borrow from the central bank’s discount window on an overnight basis.
The Consumer Price Index (CPI) inflation clocked up at just above 6% during the first half of 2014-15, which is significantly lower than the CPI of 8.9% for the same six months of the preceding fiscal year.
Lower-than-expected inflation coupled with expectations of subdued CPI in the future typically prompt the central bank to opt for monetary easing. By making the availability of credit cheaper by means of an interest rate cut, the SBP helps businesses expand and grow the national economic output.
Data shows inflation has declined mainly because of the reduction in international oil prices. International crude prices have touched $44 per barrel whose effect, according to MMS Securities, will continue to keep the CPI on the lower side during the rest of 2014-15.
