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The State Bank of Pakistan (SBP) on Monday slashed the key policy rate by 250 basis points to 15%, marking its fourth consecutive cut as inflation remains in single digits through October.
Analysts as well independent economists widely believed the central bank would cut its key interest rate further at its policy meeting, with policymakers continuing their efforts to revive a fragile economy as inflation eases off recent record highs.
“The inflation has declined faster than expected and has reached close to its medium-term target range in October,” the SBPs Monetary Policy Committee (MPC) noted, adding that “the tight monetary stance continues to play an important role in sustaining the downward trend in inflation.”
Average consumer price index inflation in the South Asian country is 8.7% in the current financial year, which started in July, the statistics bureau says. The International Monetary Fund (IMF) expects inflation to average 9.5% for the year ending June.
The central bank has slashed the benchmark policy rate to 17.5% from an all-time-high of 22% in three consecutive policy meetings since June, having last reduced it by 200 basis points in September.
Most respondents in a Reuters poll last week expected a cut of 200 bps after inflation moved down sharply from a multi-decade high of nearly 40% in May 2023, saying reductions were needed to bolster growth.
Economic activity has stabilised since last summer when the country came close to a default before an eleventh-hour bailout by the IMF.
The IMF, which in September gave a boost to Pakistan’s struggling economy by approving a long-awaited $7 billion facility, said that the South Asian nation had taken key steps to restore economic stability with consistent policy implementation under the 2023-24 standby arrangement.
While the economy has started to gradually recover, and inflation has moved sharply down from a multi-decade high of nearly 40% in May 2023, analysts say further rate cuts are needed to bolster growth.
October inflation came in at 7.2%, slightly above the government’s expectation of 6% to 7%. The finance ministry expects inflation to slow further to 5.5% to 6.5% in November.
However, inflation could pick up again in 2025, driven by electricity and gas price increases after a new $7-billion IMF bailout, and the potential impact of taxes on the retail, wholesale and the farm sector announced in the June budget to take effect in January 2025, some analysts say.
The IMF in its latest October report forecast Pakistan’s gross domestic product growth at 3.2% for the fiscal year ending June 2025, up from 2.4% in fiscal 2024.
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