Islamabad: The State Bank of Pakistan (SBP) announced a substantial 250 basis points (bps) reduction in its key policy rate on Monday, bringing it down from 17.5% to 15%. This decision, effective November 5, 2024, follows calls for a significant rate cut to support economic stability and address easing inflation.
In its statement, the SBP’s Monetary Policy Committee (MPC) attributed the rate cut to a faster-than-expected decline in inflation, which has now moved close to its medium-term target range. October’s inflation rate stood at 7.2%, marking a notable decrease from previous months. The committee also highlighted factors such as the “sharp decline in food inflation, favorable global oil prices, and the absence of anticipated adjustments in gas tariffs and petroleum development levy (PDL) rates” as primary reasons behind the accelerated disinflation.
The MPC’s statement pointed to several key developments influencing the decision. One positive factor was the International Monetary Fund (IMF) Board’s recent approval of Pakistan’s extended fund facility program, which has alleviated economic uncertainties and is expected to enhance external financing inflows.
Furthermore, October survey data revealed growing confidence and reduced inflation expectations among consumers and businesses. The MPC noted reductions in both secondary market yields on government securities and the Karachi Interbank Offered Rate (KIBOR), reflecting a positive trend in the financial market.
“Given these developments, the Committee views the current monetary policy stance as supportive of sustained price stability, maintaining inflation within the 5–7% target range,” read the SBP’s statement.
While most analysts anticipated a 200 bps cut, the 250 bps reduction exceeded expectations. This marks the fourth consecutive rate cut since June, facilitated by decreasing inflation, a low current account deficit, and an uptick in remittances. Inflation peaked at 38% in May 2023 but has since trended downward, reaching single digits in August 2024, with a CPI reading of 9.6%—the first time in over three years.
To counter prior inflationary pressures, the SBP incrementally increased the policy rate from 7% in August 2021 to a peak of 22% by April 2023. As inflationary pressures eased, the SBP began a series of rate cuts, bringing it down to 17.5% before this latest adjustment.
A survey by Topline Securities indicated that 85% of market participants had anticipated at least a 200 bps rate cut. The brokerage firm noted that single-digit inflation, especially September’s 6.9% reading, fueled expectations for further reductions. Topline also speculated that the SBP would maintain a positive real rate of 300 to 400 bps in the medium term to mitigate potential external and budgetary shocks.
