State Bank announces 150 basis points cut in key policy rate

ISLAMABAD: The State Bank of Pakistan (SBP) announced on Monday that it has decided to cut interest rates by 150 basis points (bps) to 20.5 percent.

The decision to cut the key rate to 20.5 percent came ahead of the annual budget and a week after data showed inflation fell to a 30-month low of 11.8 percent in May.

In a statement, the SBP said the central bank’s Monetary Policy Committee (MPC) met earlier today and reviewed current economic developments, highlighting a “better than expected” decline in inflation for May. went.

Commenting on the decision, the committee noted that “underlying inflationary pressures are easing, supported by fiscal stability, amid a tight monetary policy stance”.

At the same time, the MPC highlighted “some downside risks to the inflation outlook associated with uncertainty regarding upcoming budgetary measures and future energy price adjustments”.

On key developments, the committee said real GDP growth moderated at 2.4 percent “with a subdued recovery in industry and services partially offset by strong growth in agriculture”.

“Secondly, the narrowing of the current account deficit has helped improve foreign exchange (FX) reserves to about $9 billion despite large debt repayments and weak public funds,” it added.

The State Bank noted that “real interest rates are still significantly positive, which is important for continuing to guide inflation to the medium-term target of 5–7pc”.

“The government has also approached the IMF for an extended fund facility programme, which is likely to unlock monetary flows that will help further build FX buffers,” it said.

The rate cut decision comes against expectations. In the Topline Security survey, 43 percent of participants expected a 100bps cut in policy rates. In a Bloomberg survey, 63 percent of participants expected a 100bps cut in the key rate.