SBP slashes policy rate by 150bps, first time in nearly four years

KARACHI: The State Bank of Pakistan (SBP) on Monday slashed the policy rate by 150 basis points, marking its first rate reduction in nearly four years.

The decision to cut the key rate to 20.5 per cent comes two days ahead of budget and a week after data showed inflation slowed to a 30-month low of 11.8 per cent in May.

The Monetary Policy Committee (MPC) in its statement noted that while the significant decline in inflation since February was broadly in line with expectations, the May outturn was better than anticipated earlier.

The committee assessed that underlying inflationary pressures are also subsiding amidst a tight monetary policy stance, supported by fiscal consolidation.

At the same time, the MPC viewed some upside risks to the near-term inflation outlook associated with the upcoming budgetary measures and uncertainty regarding future energy price adjustments.

Notwithstanding these risks and Monday’s decision, the committee noted that the cumulative impact of the earlier monetary tightening is expected to keep inflationary pressures in check.

As per the survey conducted by Topline Research, 43 per cent of participants expected the policy rate to decline by 100bps. Similarly, in a poll conducted by CFA Society Pakistan, 48 per cent expected the policy rate to decrease by up to 100bps.

According to a Bloomberg survey, 63 per cent of the participants expected a 100bps decline in the key rate. Also, for the first time in the last four years (Since Jun 25, 2020), SBP has decided to onset monetary easing. The central bank last changed rates in an emergency meeting in late June last year, when it raised rates by 100 basis points to a record high of 22 per cent.

Talking to Geo News, Khaqan Najeeb, one of the country’s top economists, said: “If you look at the interest rate in Pakistan, which was 22 per cent, you would realise that the real interest rate has become 10 per cent positive.”

“The inflation figure of 11.8 per cent showed that the inflation had reduced to a very low level. There [has been]a very big room created in Pakistan to adjust our interest rate.”

“We should see in the upcoming monetary policies that not only the core inflation but also the CPI (Consumer Price Index) headline inflation, and food inflation are trending downward.”

Najeeb said Pakistan’s economy was clogged right now with a growth rate near 2.2 per cent, solely coming from the agriculture sector. “All in all we moved in the right direction and since the inflation is trending downward and food prices are also going down in the wake of wheat and rice crops, so the inflation should remain in the same vicinity and should be easing in the next June as well,” Najeeb said.

According to the MPC statement, first, real GDP growth remained moderate at 2.4 per cent in FY24 as per provisional data, with subdued recovery in industry and services partially offsetting the strong growth in agriculture.

Second, a reduction in the current account deficit has helped improve the FX reserves to around US$9 billion despite large debt repayments and weak official inflows, it added.

The statement adds that the government has also approached the IMF for an Extended Fund Facility program, which is likely to unlock financial inflows that will help in further build-up of FX buffers.

Lastly, international oil prices have declined, whereas non-oil commodity prices have continued to inch up, it said. Based on these developments, the committee, on balance, viewed that it is now an appropriate time to reduce the policy rate.

The committee noted that the real interest rate remains significantly positive, which is important to continue guiding inflation to the medium-term target of 5–7 per cent.