The central bank of Pakistan cut its policy rate by another 50 basis points to 10.0 percent, a move that was expected by economists, reported local media Friday.
It meant a total of reduction of 200 basis points this year following the central bank's cut of its policy rate by 150 basis points in August.
"A consistent deceleration in inflation since May 2012, to 8.8 percent in September 2012, is more than earlier estimates. Thus, the overall inflation outlook has improved," the State Bank of Pakistan (SBP) said in a statement.
With the decline in inflation to 8.8 percent from 9.10 percent in August, inflation hit its lowest rate since December 2009, which fueled hopes the central bank would cut rates today. The bank said it was increasingly likely that it would meet its 9.5 percent inflation target for fiscal year 2013 (2012 July to 2013 June).
The bank called for comprehensive fiscal reform and a lower government deficit, which would have a positive influence on commercial banks that currently find it easy to avoid lending to the private sector by extending credit to the government without any risk.
"A declining interest rate environment should lead towards a rethink of this strategy," the central bank said, noting that lending to the private sector declined to an annual rate of 0.7 percent at the end of fiscal year 2012 from 22.4 percent in fiscal year 2008.
A persistent shortage of energy is also holding back the private sector and the central bank called for an overhaul of the governance of the energy sector, which would also help lower the amount of subsidies and thus the borrowing requirements.
"Thus, at a broader level, the effectiveness of SBP's current monetary policy stance continues to weigh upon improvement in the fiscal position, better availability of energy, and an increase in foreign financial flows," the bank said.
Pakistan's gross domestic product expanded by an annual rate of 3.67 percent in the second quarter from 3.04 percent in the first quarter.
The central bank said it would also strengthen its liquidity management framework and issue details of these measures separately.