Pakistan’s Inflation Slows, Giving Room for Rate Cut : Bloomberg

By Michael Dwyer

July 9 (Bloomberg) -- Pakistan’s inflation slowed to a 16- month low in June, giving the central bank scope to reduce interest rates to prop up a faltering economy.

Consumer prices in South Asia’s second-largest economy rose 13.13 percent from a year earlier after gaining 14.39 percent in May, the Federal Bureau of Statistics said on its Web site today. That matched the median 13.1 percent forecast in a Bloomberg News survey of nine economists.

Pakistan’s economy has ground to a near halt as the global recession erodes exports and investment and Taliban insurgents launch terrorist attacks in response to an intensified military campaign against Islamic extremists. The $146 billion economy may expand as little as 0.8 percent in the year to June 2010, according to HSBC Holdings Plc, the weakest pace since 1952.

Security concerns may “hamper growth over the coming year as investors and consumers further rein in spending,” said Frederic Neumann, an economist at HSBC in Hong Kong. “The good news is that the central bank can begin to relax and start cutting interest rates, which should eventually nurse a recovery.”

State Bank of Pakistan Governor Syed Salim Raza has already begun reducing borrowing costs, slashing interest rates in April for the first time since 2002. The central bank is due to release its next monetary policy statement in Karachi at the end of this month.

‘Toughest Decision’

Pakistan was forced to turn to the International Monetary Fund for a $7.6 billion rescue package in November after its foreign reserves shrank 75 percent in a year to $3.45 billion, its current-account deficit widened to a record and inflation soared to a three-decade high.

Former Governor Shamshad Akhtar raised the central bank’s policy rate by the most in more than a decade on Nov. 12, a move she described as “the toughest decision of my life,” in order to secure the IMF bailout.

Higher borrowing costs damped spending and investment in an economy already slowing amid the global downturn, which has reduced the nation’s overseas shipments and the amount of money that Pakistanis working abroad send home.

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