Pakistan Keeps Benchmark Rate Unchanged for Second Time in 2010

March 28 (Bloomberg) -- Pakistan’s central bank refrained from cutting its benchmark interest rate as inflation of above 13 percent prevents it from reducing borrowing costs to spur economic growth.

The State Bank of Pakistan maintained its discount rate at 12.5 percent, the central bank said in an e-mailed statement from Lahore yesterday. The decision was expected by 13 of 14 economists in a Bloomberg News survey.

“Inflation is expected to stay on the higher side as commodity prices remain high and subsidies are ended,” Sayem Ali, an economist at Standard Chartered Pakistan in Karachi, said before the decision.

Pakistan wants to keep borrowing costs low to revive consumer and investment demand, derailed by terrorist attacks that claimed 3,000 lives in 2009. Risks to economic growth have “increased considerably” due to the country’s deteriorating security situation, according to the central bank.

“An upward adjustment in the policy rate at this juncture runs the risk of impeding the still nascent recovery,” the central bank said in its statement yesterday. “A downward adjustment runs the risk of fuelling already high inflation.”

The central bank’s next move may be to reduce interest rates, Governor Salim Raza indicated in a Feb. 5 interview, saying he expects the effect of higher energy costs to wear off. Inflation slowed in February for the first time in four months.

Power Rates

The government will increase domestic fuel and electricity rates from April 1, the Dawn Newspaper reported on March 24, without saying where it got the information. Fuel costs will rise by about 5 percent and power rates will be increased by more than 16 percent, the newspaper said.

Pakistan increased gas and electricity tariffs by an average 13.5 percent on March 1 as part of a directive by the International Monetary Fund to end subsidies.

The economy grew 2 percent in the last financial year ended June 30, the slowest pace in eight years. Gross domestic product may expand 3.4 percent this year, the government forecasts. The South Asian economy needs to grow at an average annual pace of 6 percent over the next five years to reduce poverty, according to the government.

Raza kept the benchmark interest rate unchanged on Jan. 31 after cutting it three times in 2009 by a cumulative 2.5 percentage points.

Consumer Prices

Consumer prices in Pakistan rose 13.04 percent in February from a year earlier after climbing 13.68 percent in January, after the government raised electricity and gas tariffs.

The central bank’s efforts to accelerate growth will be a boost to Abdul Hafeez Shaikh, who was appointed Pakistan’s finance adviser by Prime Minister Yousuf Raza Gilani this month after Finance Minister Shaukat Tarin resigned to pursue his business interests.

Shaikh became the fourth person to take charge of Pakistan’s finance ministry in the past two years and faces the challenge of attracting investment to accelerate economic growth amid terrorism and political instability. He also has to tackle food and power shortages that have caused riots in the nation of 170 million people.

Demand for power in Pakistan is three times the supply, forcing factories to shut. Food shortages have caused inflation to average 16.6 percent since January 2008.

Foreign direct investment in Pakistan dropped 53 percent to $1.32 billion in the first eight months of the fiscal year that started July 1.

More than 300 people have died since Jan. 1 as militants retaliated against the army’s offensive that targeted Taliban extremists in the country’s northwest.