The State Bank of Pakistan (SBP) is all set to cut the policy rate by 100-150 basis points and end the single policy rate regime by introducing new mechanism for liquidity management in order to fulfil IMF condition, sources told Business Recorder on Friday.
They said that declining the trend in inflation has provided passage for the cut in the policy rate to give breathing space to the country's ailing economy. Although sources in the banking industry said they were not sure about exact reduction, they were confident that cut in interest rate would be 100-150 basis points (bps).
The SBP is due issue monetary policy statement for the next three months on Saturday. Sources said that it would also announce a new mechanism of policy rate for more stability in the interbank market, and to stop wild fluctuations in overnight rates.
At present, there is only one policy rate in the country-the discount rate-at 14 percent, at which the central bank lends to banks under a three-day repo facility. However, under the new proposed interest rate regime the central bank would set two rates--policy rate or repo rate, and reverse repo rate having some gap.
"Policy or repo rate would be for borrowing from SBP by the banks, and reverse repo rate on which banks are supposed to lend SBP", they said, and added that 'repo' rate was likely to be 200-250 basis points higher than the 'reverse repo' rate. They said that introduction of the corridor in the liquidity management is a part of deal with the International Monetary Fund (IMF).
Sources said that SBP in principle, has decided to ease the monetary policy as the inflationary pressure has substantially reduced and time has come to relieve the under-stress economy. They said that SBP central board of directors would take decision on policy rate in its meeting in SBP head office on Saturday morning. The board would review the impact of tight monetary policy, inflation statistics, and other inflationary tools, besides overall economic situation to take a decision, whether to cut interest rate or not.
"We are fully hopeful for some reduction in the interest rate after reviewing the last three months' inflation statistics and economic situation," said a banker. Inflation has significantly declined during the last three months from 19 percent in March to 11.17 percent in July, the lowest level in the last 19 months, he added.
"In view of the sharp decline in inflation, and rising trend in forex reserves, we are expecting SBP to cut interest rate by some 100-150 bps in the monetary policy," he said. Sources said that if SBP would cut policy rate by 100 basis points to 13 percent from 14 percent then it is more expected that 'repo' rate would stand at 13 percent and 'reverse repo' would be 10.5-11 percent--with a difference of 200-250 basis points.
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