KARACHI: The State Bank of Pakistan (SBP) on Monday cut the key interest rate by 100 basis points to 19.5%, a decision in line with expectations of investors and analysts. Governor SBP Jameel Ahmad announced the decision of the central bank in a press conference in Karachi.
The widely forecast move followed the central bank’s decision to cut rates – from a record high of 22% – for the first time in nearly four years at its last meeting in June, as it signaled that soaring inflation was tempering.
Monday’s monetary policy meeting was the first since the government passed its budget and reached an agreement with the International Monetary Fund (IMF) for a $7 billion, 37-month loan programme.
In its statement issued separately, the Monetary Policy Committee (MPC) observed that the June 2024 inflation was slightly better than anticipated.
“The Committee also assessed that the inflationary impact of the FY25 budgetary measures was broadly in line with earlier expectations,” the SBP statement added.
It said that the external account has continued to improve, as reflected by the build-up in SBP’s Foreign Exchange reserves despite substantial repayments of debt and other obligations.
“Considering these developments – along with significantly positive real interest rate – the Committee viewed that there was room to further reduce the policy rate in a calibrated manner to support economic activity, while keeping inflationary pressures in check,” it said.
During its last meeting on June 10, the SBP decreased the key policy rate by 150 basis points (bps), bringing it down to 20.5%. This marked the central bank’s first rate reduction in four years.
Earlier this month, the IMF and Pakistani authorities reached a staff-level agreement (SLA) for a $7 billion, 37-month loan program designed to promote stability and inclusive growth.
The IMF loan programme includes tough measures such as increased tax on farm income and raising electricity prices, prompting concern among poor and middle-class Pakistanis grappling with the risk of further inflation and the prospect of higher taxes.
However, inflation has slowed in recent months. Pakistan’s consumer price index (CPI) rose 12.6% in June from a year earlier, giving the central bank room to cut rates, analysts said.
This meeting comes after the signing of a staff-level agreement with the International Monetary Fund (IMF) and the announcement of the federal budget.
In June, the SBP reduced the policy rate by 150 basis points to 20.5%, marking the first rate cut in four years. This move reflects the central bank’s efforts to stimulate economic activity, which has been sluggish for the past two years due to austerity measures implemented under an IMF bailout program.
Pakistan has recently secured a new, longer-term IMF bailout program worth $7 billion, following the completion of a short-term program earlier this year. This new agreement aims to stabilize the economy and promote inclusive growth.
While progress has been made, Pakistan’s economic challenges are far from over. The upcoming MPC decision will be closely watched as a sign of the SBP’s commitment to supporting economic recovery.
