SBP reduces interest rate to 20.5 per cent

KARACHI: The State Bank of Pakistan (SBP) Monetary Policy Committee (MPC) announced a decision to reduce the policy rate by 150 basis points, bringing it down to 20.5 per cent, effective from June 11, 2024. Previously, the policy rate stood at 22 percent.

In a statement, the State Bank of Pakistan (SBP) said the Monetary Policy Committee (MPC) had reviewed current economic developments in its meeting earlier in the day.

“Underlying inflationary pressures are also subsiding amidst a tight monetary policy stance, supported by fiscal consolidation,” the committee noted.

The SBP said that the inflation rate is currently decreasing, however, budget announcements and changes in electricity and gas prices may drive inflation up. “There is a risk of a significant increase in the current rate of inflation in July,” it said.

“The inflation rate, which was 17.3 per cent in April, fell to 11.8 per cent by the end of June. Financial indicators continued to improve during July-March of FY24. On June 25, 2023, the interest rate was set at 22 per cent,” it said. While the gross deficit remains largely unchanged from last year, it is anticipated that inflation will gradually decrease in FY 2025. However, the recent sharp fall in wheat prices is expected to be temporary, as similar trends have been observed in the past, the SBP said.

A recent survey by Topline Securities showed that 90 per cent of participants anticipated a rate cut, though opinions varied on the extent, with estimates ranging from 100 to 300 basis points.

Despite room for a significant rate reduction, experts suggested the central bank would remain cautious, given the substantial gap between the headline consumer inflation of 11.8 per cent and the previous policy rate of 22 per cent.

This significant reduction in the policy rate reflects the SBP’s strategic response to current economic conditions. The decision aims to stimulate economic activity by making borrowing more affordable for businesses and consumers.

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Lower interest rates can help boost investment and spending, contributing to economic growth and stability. The MPC’s move is aligned with efforts to manage inflationary pressures while supporting the overall economic environment.

The reduction in the policy rate is also expected to positively impact the financial markets by encouraging lending and enhancing liquidity. By easing the cost of borrowing, the SBP aims to provide relief to sectors hit hard by high borrowing costs, thereby fostering a more conducive environment for economic recovery and expansion.