The State Bank of Pakistan (SBP) declared on Monday that it had chosen to reduce the benchmark interest rate from 20.5 percent to 19.5%, a 100 basis point (bps) decrease.
The central bank announced in a statement that the Monetary Policy Committee (MPC) had agreed to lower the policy rate by 100 basis points, to 19.5 percent, with effect from July 30, 2024.
SBP Governor Jameel Ahmad told a press conference that the MPC of the central bank had convened earlier today and had discussed the recent economic events, emphasizing the need of decreasing inflationary pressure in the decision-making process.
The MPC statement also stated that the committee evaluated that the inflationary impact of the fiscal year 2025 budgetary measures was largely in accordance with earlier forecasts, and that it had noticed that the June 2024 inflation was somewhat better than expected.
SBP’s foreign exchange reserves show that the external account has improved even “despite substantial repayments of debt and other obligations,” the report added.
These factors led the committee to conclude that there was potential to further lower the policy rate in a way that would support economic growth and limit inflationary pressures.
Positive outcomes included the fact that SBP’s foreign exchange reserves “improved significantly from $4.4 billion at end-June 2023 to above $9 billion” and that the current account deficit had shrunk in the fiscal year 2024.
It also noted that the government and the International Monetary financial (IMF) had reached an agreement at the staff level for a $7 billion, three-year extended financial facility program.
The announcement provided an inflationary prognosis, stating that higher electricity prices and price hikes associated with Eid caused headline inflation to surge to 12.6 percent year over year in June 2024 from 11.8 percent in May.
It did point out that over the previous two months, core inflation had stabilized at about 14 percent, indicating that the new budget’s inflationary impact is “largely in line with expectations.”
Previously, figures from the Pakistan Bureau of Statistics (PBS) showed that the headline inflation for June was 12.6 percent year over year.
With June’s inflation rate of 12.6 percent, which was far lower than the interest rate of 20.5 percent, market investors had earlier broadly expected a rate drop, but opinions on the size of the reduction had differed.
