Pakistan's Central Bank Slashes Key Policy Rate by 200 Basis Points

The State Bank of Pakistan cut its policy rate by 200 basis points to 17.5% in response to economic demands. The reduction aims to manage inflation, stimulate economic growth, and ensure macroeconomic stability despite ongoing challenges such as low foreign reserves and debt repayments.

Pakistan's Central bank on Thursday cut its key policy rate by 200 basis points to 17.5 per cent from 19.5 per cent, bowing to demands for a major rate cut.

The State Bank in a statement said that the Monetary Policy Committee (MPC) decided to reduce the policy rate by 200 basis points (bps) to 17.5 per cent in its meeting on Thursday.

"Various factors impacting the inflation outlook were taken into consideration while reaching this decision," it said.

Inflation in August was at 9.6 per cent, resulting in a positive real interest rate of 10 per cent.

Financial experts generally anticipated a reduction of 150 bps with some forecasting a cut of up to 200 bps. However, industry leaders advocated for a deep 500 bps cut to spur economic growth.

The Monetary Policy Committee (MPC) assessed the real interest rate to still be adequately positive to bring inflation down to the medium-term target" of 5 to 7 per cent and help ensure macroeconomic stability, the statement read.

The MPC said global oil prices had fallen sharply and the SBP's foreign reserves stood at USD 9.5 billion on September 6 — despite weak inflows and continued debt repayments.

"Third, secondary market yields of government securities have declined noticeably since the last MPC meeting," it said, adding that "inflation expectations and confidence of businesses have improved in the latest pulse surveys, while those of consumers have worsened slightly".

Throughout the financial year FY24, the SBP maintained the interest rate at a high of 22 per cent. In recent months, it introduced two consecutive cuts — 150bps initially, followed by a 100bps reduction — bringing the total decrease to 2.5 percentage points.

The government which recently secured a USD 7 billion loan from the International Monetary Fund (IMF) has insisted it is taking measures to ensure this would be the last time Pakistan went to the IMF, provided all IMF conditions are met in time.

The projected growth rate for the current fiscal year (FY25) is 3.5 per cent, up from 2.4 per cent in FY24. Experts believe that reducing the cost of borrowing will encourage private sector investment, stimulate economic activity and create much-needed jobs, particularly for young Pakistanis seeking opportunities abroad.

(With inputs from agencies.)