The State Bank of Pakistan (SBP) has reduced its key interest rate by 150 basis points, bringing it down to 20.5%. This widely anticipated move marks the first rate reduction in nearly four years, aiming to stimulate economic growth amid a significant decline in retail inflation.
The decision, announced on Monday, comes just two days before the presentation of the national budget and a week after data revealed that inflation had slowed to a 30-month low of 11.8% in May. This decline in inflation has provided the central bank with the leeway to ease monetary policy.
Surveys prior to the decision reflected widespread expectations of a rate cut. A survey by Topline Research indicated that 43% of participants anticipated a 100 basis point reduction, while a CFA Society Pakistan poll showed that 48% expected a decrease of up to 100 basis points. Similarly, a Bloomberg survey found that 63% of respondents predicted a 100 basis point cut.
The last adjustment to the interest rate by the SBP occurred in an emergency meeting in late June of the previous year, where it was increased by 100 basis points to a record high of 22%.
Economist Khaqan Najeeb highlighted the significance of the rate cut in an interview with Geo News. “If you look at the interest rate in Pakistan, which was 22%, you would realize that the real interest rate has become 10% positive,” Najeeb said. “The inflation figure of 11.8% showed that inflation had reduced to a very low level. There has been a very big room created in Pakistan to adjust our interest rate.”
Najeeb also noted that the easing of interest rates is expected to continue, given the downward trend in core inflation, CPI headline inflation, and food inflation. He pointed out that the growth rate, currently around 2.2%, is primarily driven by the agriculture sector.
“All in all, we moved in the right direction,” Najeeb said. “Since inflation is trending downward and food prices are also going down in the wake of wheat and rice crops, inflation should remain in the same vicinity and should be easing in the next June as well.”
Pakistan has faced economic slowdowns over the past two years as it undertook stringent reforms under an International Monetary Fund (IMF) bailout program to stabilize its struggling economy. Speaking at a business conference in China last week, Pakistan’s Finance Minister Muhammad Aurangzeb expressed optimism about the reduction in interest rates in light of falling inflation.
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