Nepal central bank lowers interest rates to boost growth

Nepal's central bank on Friday lowered its benchmark policy rate at which it lends to commercial banks to 7.5% from 8.5%. "There is contraction in economic activities and the move is expected to reverse the slowdown," Prakash Kumar Shrestha, chief of the Economic Research Department of the central bank told Reuters after the third quarter monetary policy review.

Nepal's central bank on Friday lowered its benchmark policy rate at which it lends to commercial banks to 7.5% from 8.5%.

"There is contraction in economic activities and the move is expected to reverse the slowdown," Prakash Kumar Shrestha, chief of the Economic Research Department of the central bank told Reuters after the third quarter monetary policy review. Retail inflation edged up to 7.76% in the nine months to mid-April from 7.28% in the same period a year earlier, above the central bank's target of containing annual inflation to 7% but down from above 8% in September last year.

"Inflation is largely stable and is expected to further ease because of stable inflation in India," Shrestha said, referring to its southern neighbour which supplies all of Nepal's fuel and almost all its consumer goods. Forex reserves, which had declined to nearly $9 billion in July, rose to $10.9 billion, sufficient to cover imports for more than nine months, Finance Minister Prakash Sharan Mahat said separately in a statement, as remittances and tourism income grew.

Nepali trade and business officials had protested against higher interest rates, which topped 13% last year, adding to pressure on the ruling centre-left coalition to reduce rates to single digits. "This could have put pressure on the central bank to lower rates," Deependra Bahadur Kshetri, a former governor of the central bank, told Reuters.

Kshetri said there was some improvement in the external sector in recent months but it was still too early to "follow relatively softer monetary policy". The state-run National Statistics Office says the $40 billion economy could grow by just 1.68% this year compared to a government target of 8% due to a contraction in manufacturing, construction and trade.

The IMF this month forecast Nepal could achieve 4.4% growth.