Islamabad (TDI): The State Bank of Pakistan’s (SBP) Monetary Policy Committee (MPC) announced Thursday it was slashing the key policy rate by 200 basis points (bps) to bring it down to 17.5%.
This is the most aggressive policy rate cut since April 2020, which comes amid a decline in the headline and core inflation.
Back in April 2020 during the Covid-19 pandemic, the central bank had slashed the rate by 200bps to bring it down from 11% to 9%.
“At its meeting today, the MPC decided to cut the policy rate by 200bps to 17.5%, effective from September 13, 2024,” the SBP said in a statement.
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This is also the third successive cut in the interest rate. The SBP had reduced the policy rate by 150bps in June and 100bps in July.
“The pace of this disinflation has somewhat exceeded the MPC’s earlier expectations, mainly due to the delay in the implementation of planned increases in administered energy prices and favourable movement in global oil and food prices.”
Despite a downward trend in inflation, the MPC said there was still an inherent uncertainty, due to which it had taken a cautious monetary policy stance.
“In this regard, the committee underscored the importance of the tight monetary policy stance in driving the sustained decline in inflation over the past year,” it added.
Inflation Outlook
The MPC said the oil prices and foreign exchange reserves had seen positive developments, which caused the real interest rate to be adequately positive.
It hoped that the move will bring inflation down to the medium-term target of 5 to 7 percent and help ensure macroeconomic stability.
“This would be essential to achieve sustainable economic growth over the medium term,” it added.
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The MPC noted that inflation has come down in the past two months, and recent policy rate cuts are starting to positively impact the growth prospects in the industry and services sectors.
“Overall, the outlook for real GDP growth remains consistent with the MPC’s previous projection of 2.5-3.5% for FY25,” it stated.
The MPC also highlighted that the global macroeconomic environment has become more favourable, with a significant drop in crude oil prices and an easing of global financial conditions.
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