The State Bank of Pakistan (SBP) recently cut its key interest rate by 150 basis points (bps) to 20.5%. This decision comes after Pakistan’s inflation slowed to a 30-month low of 11.8% in May. However, close inflation monitoring is crucial to ensure it doesn’t resurge due to the increased money circulation.
The State Bank of Pakistan (SBP) has reduced its key interest rate by 150 basis points, bringing it down to 20.5%. This decision, the first rate cut in nearly four years, aims to boost economic growth following a significant drop in inflation.
This announcement comes just days before the budget presentation and shortly after data revealed that inflation had dropped to 11.8% in May, the lowest in 30 months. The Monetary Policy Committee (MPC) highlighted that the decline in inflation since February has been better than expected.
Despite the reduction, the MPC warned of potential inflation increases in July 2024 due to upcoming budget measures and possible changes in energy prices. However, they remain optimistic that the current tight monetary policy and fiscal measures will help control inflation.
Recent surveys indicated mixed expectations about the rate cut, with many predicting a reduction of around 100 basis points. The last change in the interest rate was an emergency hike to 22% in June last year.
Economist Khaqan Najeeb noted that with the current 11.8% inflation rate, there was significant room to lower the interest rate from 22%. He expects further reductions in inflation, driven by lower food prices and strong agricultural output.
Hope For Betterment, or Not?
The MPC also noted moderate economic growth at 2.4% for FY24, with agriculture performing strongly. Improved foreign exchange reserves and reduced current account deficits have further supported the rate cut decision.
Looking ahead, the government is seeking additional financial support from the IMF, which could strengthen foreign exchange reserves. Lower international oil prices have also contributed to the positive economic outlook.
Finance Minister Muhammad Aurangzeb recently indicated that interest rates are expected to decrease further as inflation continues to fall, signaling a hopeful direction for Pakistan’s economy. Businesses and consumers will likely benefit from easier access to credit, potentially leading to a rise in investments and purchases.