The State Bank of Pakistan unexpectedly dropped its discount rate 50 basis points to 13.50% from 14.00%. The Bank said: “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. 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.” The Bank also noted: “Pakistan’s economy is currently facing three broad challenges in the shape of persistence of inflation at a high level, falling private investment and low growth, and rising total debt due to a low tax to GDP ratio.”
Pakistan’s central bank last held its discount rate unchanged at 14.00% during its May meeting. Pakistan reported annual inflation of 13.92% in June this year, up from 13.23% in May, and 13.04% in April, the Bank had previously commented that “the average CPI inflation for FY11 is likely to remain between 14 and 14.5 percent, which is lower than the central bank’s earlier projections,”. The Pakistani government announced an inflation target of 12 percent for FY 2012, with a desired path for inflation of 9.5% and 8% in the subsequent 2 years.