SBP cuts interest rate to 7%, lowest in 42 years

The State Bank of Pakistan on Saturday cut its benchmark interest rate to 7 per cent, the lowest in 42 years in a bid to increase economic growth.

“The discount rate has been lowered to 7% from 8%,” State Bank Governor Ashraf Mahmood Wathra said during a press conference in Islamabad on Saturday.

The discount rate is at its lowest since August 1973.

In March, in line with analysts’ expectations, the SBP reduced the discount rate by 0.5% to 8% for the next two months.

The central bank cut the key interest rate in the economy by a cumulative 2% since last November partly because of a sharp decline in inflation.

The discount rate is the interest rate at which commercial banks are allowed to borrow from the central bank’s discount window on an overnight basis. Central banks use this monetary policy tool to control money supply in the economy in order to achieve price stability and economic growth targets.

Inflation has decreased each month this year as transport and food prices fell.

Inflation will average about 4.2% in 2015 before accelerating to 5.4% in 2016, according to a Bloomberg survey published in April.

The recent cut in discount rate comes after the International Monetary Fund scaled back Pakistan’s growth forecast for the year through June 30 to 4.1% from 4.3% and 4.5% from 4.7% for the following 12 months.

Earlier this month, Standard and Poor’s (S&P) ratings’ agency raised Pakistan’s credit rating to positive from stable but affirmed its B- rating, as the country experiences economic growth, according to Bloomberg news agency.

“The positive outlook reflects our expectations of Pakistan’s improved economic growth prospects, fiscal and external performance, and the supportive relationship of external donors over the next 12 months,” the ratings agency said.