Pakistan Central Bank Cuts Policy Rates by 200 bps to 17.5%

Pakistan's central bank reduced its key policy rate by 200 basis points to 17.5% from 19.5% on Thursday. The State Bank of Pakistan (SBP) announced that the Monetary Policy Committee (MPC) made this decision after considering various factors affecting inflation.

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Inflation and Economic Growth

In August, inflation was recorded at 9.6%, resulting in a positive real interest rate of 10%. Financial experts had predicted a reduction of 150 basis points, with some expecting up to 200 basis points. However, industry leaders had called for a more significant cut of 500 basis points to boost economic growth.

The MPC noted that the real interest rate remains sufficiently positive to reduce inflation to the medium-term target of 5-7% and ensure macroeconomic stability. "Various factors impacting the inflation outlook were taken into consideration while reaching this decision," the statement said.

Global Oil Prices and Foreign Reserves

The committee highlighted that global oil prices have dropped significantly, and SBP’s foreign reserves stood at USD 9.5 billion as of September 6, despite weak inflows and ongoing debt repayments. "Third, secondary market yields of government securities have declined noticeably since the last MPC meeting," it added.

Throughout FY24, the SBP maintained a high-interest rate of 22%. Recently, it introduced two consecutive cuts—150 basis points initially, followed by a 100 basis points reduction—totaling a decrease of 2.5 percentage points.

IMF Loan and Economic Measures

The government recently secured a USD 7 billion loan from the International Monetary Fund (IMF). It has assured that this will be the last time Pakistan seeks IMF assistance if all conditions are met timely. The projected growth rate for FY25 is set at 3.5%, an increase from 2.4% in FY24.

Experts believe that lowering borrowing costs will encourage private sector investment, stimulate economic activity, and create jobs, especially for young Pakistanis looking for opportunities abroad. "Inflation expectations and confidence of businesses have improved in the latest pulse surveys, while those of consumers have worsened slightly," the statement read.

The MPC's decision aims to balance inflation control with economic growth, reflecting a strategic approach to Pakistan's financial stability and development goals.