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Pakistan central bank cuts key discount rate to 7%

ISLAM FINANCE
Asim Hafeez | Bloomberg | Getty Images

Pakistan's central bank cut its benchmark interest rate to 7 percent from 8 percent on Saturday, a larger-than-expected move aimed at spurring economic growth against a backdrop of slowing inflation.

Some analysts had been expecting a smaller cut of 50 basis points. The larger reduction came after annual inflation fell to 2.11 percent in April from 2.49 percent in March, largely on the back of weak oil prices.

The new rate comes into effect on May 25.

Lower borrowing costs could be a boost for Prime Minister Nawaz Sharif, who is under pressure to do more to revive the economy, end persistent power shortages and create favourable conditions for badly needed foreign investment.

The International Monetary Fund saved Pakistan from possible default in 2013 by agreeing to lend it $6.7 billion over three years. Foreign exchange reserves have more than doubled since the beginning of 2014, and now stand at $17.7 billion.

The State Bank of Pakistan said in a statement it expected inflation to remain subdued, although uncertainty over international oil prices and possible increases in domestic energy bills were the main risks to the outlook.

GDP was estimated to have grown by 4.2 percent in the financial year ending in June, slightly higher than the 4.0 percent increase the previous year.

The central bank said overcoming energy shortages, improving law and order and realizing major energy and infrastructure projects were expected to boost investment and growth.

"Consequently, (economic) growth is expected to be revived at a relatively faster pace going forward," the bank said.