State Bank of Pakistan likely to cut policy rate once again

Pakistan’s central bank to lower its benchmark policy rate for the third time in a row at its next monetary policy meeting on Friday, September 12.

In August, inflation dropped to single digits. The reduction, which is anticipated to be between 1% and 1.5%, is meant to boost economic activity in the fiscal year 2024–2025.

With a real interest rate of 10–11% resulting from the considerable difference between the State Bank of Pakistan’s (SBP) current policy rate and the most recent inflation figure, there is room for a further drop.

In order to guard against unforeseen spikes in inflation, Pakistan has historically kept its real interest rate average between three and five percent.

Ismail Iqbal Securities’ Head of Research, Saad Hanif, predicts the SBP would go cautiously and choose modest cutbacks over drastic ones.

He identifies two key causes for this. The first is the bank’s intention to stick to strict monetary policy in accordance with guidelines from the International Monetary Fund (IMF) as Pakistan pursues a $7 billion loan package that is anticipated in September.

Second, a more significant rate decrease would cause an unintended depletion of foreign exchange reserves, which might weaken the rupee, which has been stuck at Rs278 and Rs279/$ for more than five months.

Pakistan and the IMF came to a staff-level agreement in July 2024, and the executive board’s formal approval is set to follow. In a remark, Abbas stated, “The IMF’s commitment to promoting disinflation supports our hope of continued monetary easing,” and added that a rate decrease is consistent with the IMF’s ongoing efforts to stabilize the economy and its policy position.