SBP cuts key policy rate by 200bps to 17.5pc amid slowing inflation

KARACHI: The State Bank of Pakistan (SBP) announced to cut its key policy rate by 200 basis points (bps) to 17.5 percent amid slowing inflation and declining international oil prices.

SBP in a statement said, “The Monetary Policy Committee (MPC) decided to reduce the policy rate by 200 bps to 17.5 percent, effective from September 13, 2024,” adding that it took into account the core inflation which fell sharply over the past two months.

“The pace of this disinflation has somewhat exceeded the Committee’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,” the Monetary Policy Statement said.

The MPC assessed the real interest rate to still be adequately positive to bring inflation down to the medium-term target of 5 – 7 percent and help ensure macroeconomic stability.

Today’s announcement is the central bank’s third successive reduction in the interest rate after a 150bps reduction in June and another 100bps cut at the end of July.

Regarding the reasons behind its decision, the MPC noted several key developments including global oil prices having fallen sharply and the SBP’s foreign exchange reserves stood at $9.5 billion on Sept 6 — despite weak FX inflows and continued debt repayments.

Furthermore, the monetary policy stated that secondary market yields of government securities have declined noticeably since the last MPC meeting is also the reason for the decision. “Inflation expectations and confidence of businesses have improved in the latest pulse surveys, while those of consumers have worsened slightly”. Lastly, the FBR tax collection during JulyAugust 2024 was lower than the target.

Inflation outlook

Regarding the inflation outlook, the MPC assessed that the downward trajectory in headline inflation and core inflation in August reflected the impact of contained demand, reinforced by improved supplies of major food items, favorable global commodity prices, and delays in upward adjustments in administered energy prices.

“Maintaining its downward trajectory, headline inflation eased to single digit to 9.6 percent y/y in August 2024 from 12.6 percent in June 2024 at the time of the last MPC meeting, while core inflation declined to 11.9 percent from 14.1 percent,” the statement said.

On balance, the Committee viewed a possibility of FY25 average inflation falling below the earlier forecast range of 11.5 – 13.5 percent. However, this assessment is contingent on achieving the targeted fiscal consolidation and timely realization of the planned external inflows, the SBP monetary policy statement reads.

Financial experts generally anticipated a reduction of 150 basis points, with some forecasting a cut of up to 200bps. However, industry leaders advocated for a more dramatic reduction of 500bps to spur economic growth.

Throughout the financial year FY24, the SBP maintained the interest rate at a high of 22pc. In recent months, it introduced two consecutive cuts — 150bps initially, followed by a 100bps reduction — bringing the total decrease to 2.5 percentage points.

The projected growth rate for the current fiscal year (FY25) is 3.5pc, up from 2.4pc in FY24. Experts believe that reducing the cost of borrowing will encourage private sector investment, stimulate economic activity and create much-needed jobs, particularly for young Pakistanis seeking opportunities abroad.