Compiled by this website: Raza said that interest rates should be lowered to combat inflation

Compiled by this website: Raza said that interest rates should be lowered to combat inflation

Pakistan to Ease Rates as Inflation Fight ‘Not Won,’ Raza Says

By Naween A. Mangi

March 14 (Bloomberg) — Pakistan’s central bank Governor Syed Salim Raza said Asia’s highest interest rates will be gradually reduced this year, ruling out steep cuts that may fuel inflation.

“The risk of too sharp a cut is to convey the feeling that the battle against inflation has been won and unfortunately, that’s not true,” Raza said in an interview in Karachi yesterday. “Too sharp a cut would seem to be populist, premature or succumbing to pressure. I would err on the side of gradualism and do it in stages.”

State Bank of Pakistan raised borrowing costs five times in the past 18 months as inflation accelerated to a three-decade high and domestic political turmoil distracted the government. Gradual reductions may not be enough to revive the economy as the global recession curbs demand for Pakistan’s exports.

“Now is the time to be aggressive and cutting the policy rate by 200 basis points in April will be aggressive,” said Nasim Beg, who manages the equivalent of $118.6 million in stocks and bonds at Arif Habib Investments Ltd. in Karachi . “That’s what the economy needs.”

A widening rift between President Asif Ali Zardari and his former ally Nawaz Sharif is distracting the government from tackling the economic slowdown and deteriorating security.

Lawyers, backed by Sharif, began a four-day protest march on March 12, and plan to converge on the capital Islamabad on March 16. Political tensions flared last month when Sharif accused Zardari of backing a Supreme Court ruling that barred the former premier from running for public office.

Room to Cut

The Asian nation may have room to cut rates if inflation keeps slowing, the International Monetary Fund said last month. Foreign exchange reserves held by the central bank have risen to $6.6 billion on March 7 after falling to $3.5 billion in October.

“With things going in the right direction, the stage is set within the next couple of months for an opportunity to lower the rate,” Raza, who took over as governor in January, said.

While inflation has declined from a three-decade high reached in August, prices accelerated for the first time in four months in February as food costs rose.

The central bank predicts inflation may ease to 11 percent by June from 21.07 percent last month.

Former Governor Shamshad Akhtar increased the central bank’s discount rate to slow inflation and help shore up Pakistan’s foreign-exchange reserves. The country was forced to turn to the IMF for a $7.6 billion rescue package last year after its reserves shrank 75 percent in a year to $3.45 billion.

Higher borrowing costs have dented growth in the economy, which is predicted by the government to expand 2.5 percent this fiscal year to June 30, down from 5.8 percent last year.

“Monetary policy actions should be based on future expectations,” said Farid Khan, director at Credit Suisse Pakistan in Karachi. “Inflation will fall sharply and hence there is room for interest rate cuts this calendar year.”

Khan expects a reduction of up to one percentage point at the central bank’s next monetary-policy review in April and another cut by July.

Razar said that interest rates should be lowered to combat inflation

Author: Naween A. Mangi

March 14 (Bloomberg) – National Bank of Pakistan Governor Syed Salim Raza said that Asia will gradually reduce bank interest rates this year, ruling out the possibility of a sharp decline that may fuel inflation.

“The risk of significant price cuts is to convey confidence in defeating inflation, but unfortunately, this is impossible.” Raza said in an interview in Karachi yesterday, “A price cut that is too rapid seems to be Some people’s ideas are too immature or have been succumbed to inflation. I once made a mistake in insisting too much on gradualism. I called it a stage error.”

The State Bank of Pakistan has raised lending rates five times in the past 18 months as inflation reached a three-decade high and domestic political unrest distracted the government. Gradually lowering interest rates may not be enough to boost economic recovery as the recession dampens demand and affects Pakistan’s exports.

“There is good news now that the government may issue policies in April this year to cut interest rates by 200 basis points.” Naseem Beg said, he is the manager of the Karachi branch of Arif Habibi Investment Co., Ltd., which manages a value of 1.186 billion in stocks and bonds. “The release of this policy is an economic necessity.”

President Asif Ali ZardariThe growing rift with his former ally Nawaz Sharif has led to a decline in economic growth, deterioration in social security and a precarious government.

Supporting Rif’s lawyers, they began a four-day protest march on March 12 and planned to gather in the capital Islamabad on March 16. Political tensions erupted over last month’s Supreme Court ruling that accused Zardar Sharif of barring the former prime minister from running for office.

Space for interest rate cuts

The International Monetary Fund said last month that Asian countries may cut interest rates if inflation continues to slow. The central bank’s foreign exchange reserves rose to US$6.6 billion on March 7, after falling to a low of US$3.5 billion in October.

“With things moving in the right direction, there is a possibility that bank interest rates will be reduced in the coming months,” said Raza, the new bank governor in January.

Inflation, which reached a 30-year high in August, has now declined. After food prices rose in February, prices accelerated for the first time in the next four months.

The central bank expects the inflation rate to fall to 11% last month from 21.7% in July.

Former President Shamshad Akhtar increased the central bank’s discount rate, helping Pakistan increase its foreign exchange reserves while easing inflation. National foreign exchange reserves fell by 75% to $3.45 billion last year after the country turned to the International Monetary Fund for help in a $7.6 billion rescue package.

Rising borrowing costs have affected economic growth, with the government forecasting growth of 2.5% for the fiscal year to June 30, down from 5.8% last year.

“Monetary policy should be based on expectations for the future,” said Farid Khan, executive director of Pakistan Credit Corporation Karachi. “The inflation rate will fall sharply, so there will be room for interest rate cuts this year. ”

At the central bank’s next monetary policy review in April, Khan expects an interest rate cut of more than one percentage point, with another rate cut expected to occur in July.

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