Pakistan's Central Bank Surprises with Big Rate Cut Amid Stabilizing Economy

Pakistan's central bank reduced its policy rate by a significant 200 basis points to 17.5% in an effort to stimulate growth as inflation declines. This marks the third consecutive rate cut since June. Despite economic stabilization efforts, concerns persist about the timely approval of an IMF agreement.

Pakistan's central bank made a surprising move on Thursday, cutting its key policy rate by a larger-than-expected 200 basis points to 17.5%. This is the third straight reduction since June, aimed at spurring economic growth as inflation eases.

A Reuters poll had anticipated a 150 basis point cut after inflation dropped to single digits in August for the first time in nearly three years. This follows previous cuts in June and July, reducing the rate from a record 22% set in June 2023.

Annual consumer price inflation in Pakistan slowed to 9.6% in August, down from nearly 40% in May 2023. The central bank's Monetary Policy Committee stated that the real interest rate remains sufficiently positive to achieve their medium-term inflation target of 5-7% and ensure macroeconomic stability.

The bank highlighted the necessity of this move for sustainable economic growth. The committee also noted that average inflation for the fiscal year ending mid-2025 might fall below the previously forecasted range of 11.5-13.5%.

Though economic indicators have stabilized since last summer, when Pakistan nearly defaulted before receiving an IMF bailout, concerns rise again over the board's pending approval of a new $7 billion, three-year program initiated in June. Approval delays might impact the forecast, which counts on timely foreign inflows.

(With inputs from agencies.)