ISLAMABAD: The State Bank of Pakistan has reduced the interest rate to a 42-year low of seven per cent in order to spur economic activities.

Announcing the monetary policy at a press conference here on Saturday, SBP Governor Ashraf Mahmood Wathra said the policy rate had been cut by 100 basis points to boost investment in the country.

He cited a string of positive economic indicators for the historic rate cut, which will come into effect on Monday (May 25).

The fourth consecutive policy rate cut since November has come in the wake of a pledge by the government that next financial year`s budget would focus on growth-oriented economic policies. The budget will be announced on June 5.

The SBP governor said the reduction in the interest rate would promote business activities in the country.

Other factors like availability of gas and electricity, along with their prices, had also affected industrial growth, he added.

Finance Minister Ishaq Dar welcomed the decision and said the rate cut would boost economic activities.

`The lowering of interestrate is a manifestation of improvement in macro-economic conditions as reflected in multi-year low inflation and considerably improved external account,` he said.

The Consumer Price Index-based inflation of 4.8pc in the first 10 months of the current financial year prompted the SBP to slash the interest rate, he said.

Mr Dar said the decision was expected to result in a significant decline in market interest rates.

Mr Wathra said the SBP board reviewed the interest rate corridor the band of minimum and maximum interbank rates cutting the upper ceiling by 1pc to 7pc and fixing lower cap at 5pc by bringing it down from 5.5pc.

He said the board decidedto reduce the width of the corridor from 2.5pc to 2pc to ensure predictability in the money market.

The new target rate had been set at 0.5pc, he said, adding that the SBP would ensure that the overnight rate remained close to this rate and this would be the main policy rate. The measure would also promote largescale manufacturing and boost economic growth.

POSITIVE OUTLOOK: Later, the central bank said in a statement that macroeconomic conditions towards the end of FY15 had further improved compared to the beginning of the fiscal year.

`Current account deficit has narrowed down; averageannual inflation is significantly below the target; there is a marginal uptick in real GDP growth; and foreign exchange reserve build-up continues.` It said that all these developments were reflected in the recent upgrades in outlook by international rating agencies that had further improved investor confidence.

The SBP said the current macroeconomic stability achleved through domestic policies and favourable external developments provided an opportunity to focus on reforms that would put the economy on sustainable growth path.

With contraction in imports, led by sharp decline in oil prices, and strong growth in remittances, the external current account deficit at $1.4 billion during July-April FY15 was around half of the deficit recorded in the corresponding period of last year, the statement said.

`The improvement has overshadowed lower surplus in capital and financial account, especially weak foreign private investment. Overall, this has supported the reserve building efforts with net SBP reserves rising from $9.1bn as of June 30, 2014 to $12.5bn as of May 15, 2015.

`They are expected to increase further due to subdued outlook of international oil prices, successful continuation of IMF programme, and realisation of expected official foreign inflows.

Increase in foreign private inflows can further strengthen this outlook and sustain stability in the foreign exchange marl(et.