The State Bank of Pakistan (SBP) lowered interest rates on Monday by 1%, or 100 basis points (bps), from 20.5% to 19.5%. This was the bank’s second consecutive rate decrease, and it was largely expected by the market. The SBP cited a small cooling in the inflation rate.
“We have noted that the rate of inflation is on a declining trend,” SBP Governor Jameel Ahmad stated at a news conference following the Monetary Policy Committee (MPC) meeting.
“The inflation rate has dropped down to 12.60% from 38% while the external account has continued to improve,” the governor of the SBP stated. “The reduction in the interest rate reflects our trust in the current economic trajectory.”
After nearly a year of record-high 22%, the SBP’s MPC cut its benchmark interest rate by 150 basis points to 20.5% last month.
“Future projections predict the average inflation rate to stabilise between 23% and 25%, after last year’s 23.4%,” the finance czar added.
In a statement, the central bank noted several encouraging signs for the country’s economy, including a minor decline in inflation, an increase in SBP’s foreign exchange (FX) reserves despite debt repayments, and an agreement at the staff level with the International Monetary Fund (IMF) for a $7.0 billion, 37-month extended fund facility (EFF) program.
The committee concluded that despite significant debt and other obligation repayments, the external account has improved over time, as evidenced by the growth in the central bank’s foreign exchange reserves.
The events, when combined with noticeably higher real interest rates, caused the policy rate to be further lowered in a way that balanced supporting economic growth with containing inflationary pressures.
The committee reviewed the major changes that have occurred since its previous meeting, noting that the current account deficit shrank dramatically in FY24 and that SBP’s foreign exchange reserves increased dramatically from $4.4 billion at the end of June 2023 to over $9.0 billion.
According to the statement, mood surveys conducted in July revealed a decline in consumer and business confidence as well as expectations for inflation.
It also notes that while the price of food and metals has decreased recently, the price of international oil has remained unstable in recent weeks.
Furthermore, central banks in advanced economies have begun to lower their policy rates due to the relaxation of labor market conditions and inflationary pressures.
After evaluating the events, the MPC concluded that, in spite of the decision made today, the monetary policy stance is still sufficiently restrictive to direct inflation toward the 5%–7% medium-term objective.
It further said that the evaluation is also reliant on accomplishing the intended fiscal consolidation, timely realization of scheduled foreign inflows, and structural changes to address the economy’s underlying vulnerabilities.
