KARACHI: The State Bank of Pakistan (SBP) cut its key interest rate by 150 basis points on Monday in a widely anticipated move, marking its first-rate reduction in about four years in its effort to boost growth amid a sharp reduce in retail inflation. The development comes ahead of Pakistan’s annual budget and a week after data showed inflation slowed to a 30-month low of 11.8% in May. The South Asian country is holding talks with the International Monetary Fund (IMF) for a loan estimated to be anything between $6 billion to $8 billion to avert a default.
The growth target for the next year is likely to be higher at 3.6% than this year’s 2% and last year’s economic contraction. Experts and the business community have expressed mix reactions to the cut, and are looking forward to the budget for clarity on the central bank’s upcoming moves.
Commenting over the development, Musadaq Zulqarnain, Director of The Pakistan Textile Council and Chairman At Interloop told the media that it will surely help a bit, though the rates will still be in a higher than workable range. However, the move will set the direction, he remarked. He further said that they will have to wait for the budget to see its overall impact.
M Abdul Aleem, Chief Executive Officer and Secretary General of Pakistan’s Overseas Investors Chamber Of Commerce and Industry (OICCI) said that at present their real policy rate stands at 10% and this leaves room for a higher cut, at least by 2%. He remarked that the monetary policy committee took the decision to reduce the rate by 150 bps.
He was of the view that the curt in the policy rate will provide relief of about 600 billion rupees in debt servicing to the government and also to businesses by dropping the cost of borrowing. He said that the business confidence has already improved, as reflected in the latest OICCI Business Confidence Index.
Responding to a question regarding the outcome of the next budget, he said that they are expecting a revival of economic activities and the creation of job opportunities.
Talking to media, Tahir Abbas, Head Of Research at Arif Habib Limited said that the SBP has hinted that inflationary pressures are easing, supported by a significantly positive real interest rate. He believed that this monetary easing cycle would persist, with an additional 3-4% decrease expected in 2024.
He said that the stock market is likely to take the news positively but there remains fear and uncertainty over hefty taxation steps in the upcoming federal budget.
Abid Suleri, Executive Director of the Sustainable Development Policy Institute told the media that this is a prudent step by SBP as the central bank is cautious because of the next budget and some steps that may push inflation up once again. Abid Suleri said that they need to remember that the monetary policy is not just for inflation, but also to encourage domestic savings to stop dollarization.
Almas Hyder, Senior Member of the Lahore Chamber of Commerce and Industry and former president said that a rate cut signifies taming of inflation and creating opportunities for more investment. He hoped that this will start a positive cycle of investment planning in future.
