In response to demands for a significant rate cut, the State Bank of Pakistan (SBP) announced on Monday that it had decided to reduce its key policy rate by 250 basis points (bps) to 15% from 17.5 percent.
The SPB released a statement stating that “at its meeting today, the Monetary Policy Committee (MPC) decided to cut the policy rate by 250 basis points to 15%, effective from November 5, 2024.” The statement also stated that the Committee noted that inflation had decreased “faster than expected and has reached close to its medium-term target range in October.”
It emphasized that recent disinflation was accelerated by a “sharp decline in food inflation, favorable global oil prices, and absence of expected adjustments in gas tariffs and PDL rates.”
The International Monetary Fund (IMF) Board had approved Pakistan’s new extended fund facility program, which reduced uncertainty and improved prospects for external flows, according to the MPC’s key developments.
The statement went on to say that, “second, the surveys conducted in October showed an improvement in confidence and a reduction in inflation expectations of both consumers and businesses.”
The Committee also noted a decline in the Karachi Interbank Offered Rate (Kibor) and secondary market yields on government securities.
It stated that “the Committee viewed the current monetary policy stance as appropriate to achieve the objective of price stability on a durable basis by maintaining inflation within the target range of 5% to 7%” in light of the developments.
Due to lower inflation, a smaller current account deficit, and increased remittances, the majority of analysts had predicted that the central bank would cut its policy rate by 200 basis points at its meeting. This would be the fourth cut in a row since June.
October’s inflation figures were 7.2 percentage points. In August, the Consumer Price Index (CPI) had slowed to 9.6 percent, marking the first reading below 10 percent in more than three years.
In November 2021, inflation reached 10%, and it remained in the double digits for 33 months until July 2024. In between, it reached a peak of 38 percent in May 2023.
In an effort to restrain inflation, the SBP gradually increased its policy rate from 7 percentage points in August 2021 to a peak of 22 percentage points in April 2023. As inflation began to ease, the rate has been lowered to 17.5 percent since then.
Topline Securities found in a survey that 85% of market participants anticipated that the central bank would announce a minimum rate cut of 200 basis points.
The company stated, “We believe that the single-digit inflation reading of 6.9pc in September 2024 is driven by the larger rate cut expectations in the upcoming monetary policy meetings.”
As a result, it was anticipated that SBP would maintain a positive real rate in the 300-400 bps range over the medium term in order to absorb any shocks to the budget or the outside world.
