Karachi: The State Bank of Pakistan (SBP) cut its key interest rate by 150 basis points on Monday in an expected move, the first cut in nearly four years in its bid to boost growth amid a sharp drop in retail inflation.
The decision to cut the key rate to 20.5% came two days before the budget and a week before inflation hit a 30-month low of 11.8% in May.
However, the Monetary Policy Committee (MPC) expects inflation to rise significantly from current levels in July 2024, before easing gradually in FY25.
The MPC said in a statement that while the sharp drop in inflation since February was in line with expectations, the increase in May was better than expected.
The committee noted that the easing of inflationary pressure amid a tight monetary policy stance is supported by fiscal consolidation.
At the same time, the MPC saw some downside risks to the near-term inflation outlook related to the uncertainty surrounding the upcoming budget measure and future energy price changes.
Despite these risks and today’s decision, the Committee noted that the cumulative effect of previous monetary tightening is expected to keep inflationary pressure under control.
According to a survey conducted by Topline Research, 43% of participants expect the speed of the policy to decrease by 100 seconds.
Similarly, in a survey conducted by CFA Society Pakistan, 48% expected the policy to drop to 100bit/second.
According to a Bloomberg survey, 63% of participants expect the key speed to fall within 100 seconds.
Also, for the first time in four years (since 25 June 2020), SBP has decided to start monetary easing.
The central bank last raised rates 100 times in an emergency meeting at the end of June last year, raising rates by a record 22%.
Speaking to Geo News, Hakan Najib, one of the country’s top economists, said, “If you look at the interest rate in Pakistan, which is 22%, you will find that the real interest rate is positive at 10%.
“Inflation rate of 11.8% shows that inflation has come down to a very low level. Pakistan has got a lot of room to adjust our interest rates.”
“In the future monetary policy, we must see not only core inflation but also CPI (Consumer Price Index) headline inflation and food inflation decrease.”
Najeeb said that currently Pakistan’s economic growth rate is around 2.2%, which comes from agriculture alone.
“In general, we are moving in the right direction and after the wheat and rice crops, inflation is down and food is also down, so inflation should stay in the same range and ease next June,” Najib said.
First, according to provisional data, real GDP growth remained flat at an average of 2.4% in FY24, with declines in industry and services partially offsetting strong growth in agriculture, the MPC statement said.
Second, the narrowing of the current account deficit helped raise foreign exchange reserves to about US $ 9 billion, despite large debt cancellations and weak official flows.
The statement said the government has approached HPG for an extended funding program that is likely to unlock financial flows that will help build further foreign exchange buffers.
As a result, the international price of oil decreased, while the price of non-oil and gas commodities increased.
Based on these developments, the Committee feels that, on balance, now is the right time to change the policy.
The Committee notes that real interest rates are sufficiently positive to maintain the medium-term inflation target of 5-7%.
Economic activity has slowed in Pakistan over the past two years, and it has implemented drastic reforms with the help of the International Monetary Fund (IMF) to stabilize the crumbling economy.
Speaking at a business conference in China last week, Pakistan’s Finance Minister Muhammad Aurangzeb said he expected interest rates to drop due to lower inflation.
