The State Bank of Pakistan (SBP) announced on Monday a reduction in the key interest rate by 150 basis points, bringing it down to 20.5 per cent. This decision comes ahead of the annual budget and follows recent data showing a significant slowdown in inflation to a 30-month low of 11.8pc in May.
In a statement, the SBP’s Monetary Policy Committee (MPC) detailed its review of current economic conditions, noting a “better than anticipated” decline in inflation last month. The committee observed that underlying inflationary pressures are subsiding, thanks to a tight monetary policy stance and fiscal consolidation.
However, the MPC also highlighted potential risks to the near-term inflation outlook, particularly related to forthcoming budgetary measures and uncertainties about future energy price adjustments.
The committee reported that real GDP growth remained moderate at 2.4pc, with a subdued recovery in industry and services partially offsetting strong growth in agriculture. Additionally, a reduction in the current account deficit has helped bolster foreign exchange reserves to around $9 billion, despite significant debt repayments and weak official inflows.
The SBP emphasised that the real interest rate remains significantly positive, which is crucial for guiding inflation towards the medium-term target of 5-7pc.
A recent survey by Topline Securities indicated that 90pc of participants expected a rate cut, though opinions varied on the extent, with estimates ranging from 100 to 300 basis points. Experts noted that while there was room for a significant rate reduction due to the substantial gap between the headline consumer inflation rate of 11.8pc and the previous policy rate of 22pc, the SBP would proceed cautiously.
