KARACHI: In view of declining inflation, the State Bank of Pakistan (SBP) on Saturday decided to reduce the policy rate by 50 basis points, or 0.5%, to 6% for the next two months.

The central bank adjusts the benchmark interest rate every two months mainly to address price stability and economic growth targets. The SBP’s decision to reduce the policy rate by 50 basis points is partly based on its expectation that average inflation, measured by Consumer Price Index (CPI), will remain 4.5%-5.5% for 2015-16.

Although the SBP listed both upside and downside risks to its inflation forecast, it noted that the probability of downside risks appear to be greater than the upside risks in view of the current economic trends.

Saying that current account deficit “seems manageable,” the SBP stated the upward trajectory of the last two fiscal years in the foreign exchange reserves will likely maintain pace.

The SBP said the off-take of fixed investment loans by energy generation and distribution, chemicals and services sectors signal possible increase in their productive activity in coming months.

“The implementation of infrastructure development and energy projects under the China-Pakistan Economic Corridor will further enhance the improving investment environment. Therefore, there is anticipation of higher economic activity in 2015-16, which is expected to boost credit uptake,” it said.

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