In response to calls for a significant rate drop, the State Bank of Pakistan (SBP) declared on Monday that it had chosen to lower its key policy rate by 250 basis points (bps), from 17.5 percent to 15 percent.
The Monetary Policy Committee (MPC) decided to lower the policy rate by 250 basis points to 15%, effective November 5, 2024, at its meeting today, the SPB said in a statement. The Committee also mentioned that inflation had decreased “more quickly than anticipated and has approached its medium-term target range in October.”
It emphasized that recent disinflation was driven by a “sharp decline in food inflation, favourable global oil prices, and absence of expected adjustments in gas tariffs and PDL rates.”
The International Monetary financial (IMF) Board’s approval of Pakistan’s new extended financial facility program, which decreased uncertainty and enhanced the prospects of external flows, was one of the MPC’s major milestones.
“Secondly, the October surveys revealed a rise in confidence and a decrease in inflation expectations among businesses and consumers,” the statement said.
The Committee also observed a decrease in the Karachi Interbank Offered Rate (Kibor) and secondary market yields on government assets.
It stated that in light of the developments, the Committee believed that the current monetary policy stance was suitable for achieving the goal of price stability on a long-term basis by keeping inflation within the target range of 5 to 7 percent.
A decrease in inflation, a reduced current account deficit, and increased remittances led most analysts to predict that the central bank would lower its policy rate by 200 basis points during its meeting, the fourth straight cut since June.
October’s inflation rate was 7.2 percent. In August, the Consumer Price Index (CPI), which measures headline inflation, dropped to 9.6 percent, the first single-digit reading in almost three years.
After surpassing 10 percent in November 2021, inflation stayed in double digits for 33 months in a row until July 2024. It peaked in May 2023 at 38 percent.
The SBP had progressively increased its policy rate from 7 percent in August 2021 to a peak of 22 percent by April 2023 in an attempt to combat inflationary pressure. Since then, when inflation started to decline, the rate has been reduced to 17.5%.
According to a study by brokerage Topline Securities, 85% of market participants anticipated that the central bank will declare a minimum rate drop of 200 basis points.
The company stated, “We think that the single-digit inflation reading of 6.9pc in September 2024 is what is driving the larger rate cut expectations in the upcoming monetary policy meetings.”
In order to absorb any external and budgetary shock, it was therefore assumed that SBP would maintain a positive real rate in the 300–400 bps range over the medium term.
