The Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) announced its most significant cut in the key policy rate since April 2020, reducing it by 200 basis points (bps) to 17.5% due to slowing inflation and declining international oil prices.
The committee decided to cut the policy rate by 200 bps to 17.5% effective from September 13, 2024, citing sharp falls in both headline and core inflation over the past two months, exceeding its earlier expectations.
This marks the SBP’s third successive rate cut after reductions of 150 bps in June and 100 bps at the end of July, but Thursday’s cut is the strongest in over four years. The MPC warned of inherent uncertainty, emphasizing the importance of a cautious monetary policy stance.
The MPC also assessed the real interest rate to be adequately positive, aiming to bring inflation down to the medium-term target of 5-7 percent and ensure macroeconomic stability for sustainable economic growth.
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Citing positive developments such as the decline in oil prices and improvement in FX reserves, the committee observed that the ease in inflationary pressures and recent policy rate cuts would support growth prospects in the industry and services sectors.
The global macroeconomic environment was seen as favorable, with a substantial softening of crude oil prices and relative easing of global financial conditions expected to contain the overall trade deficit in FY25, along with robust workers’ remittances keeping the current account deficit within the projected range of 0-1% of GDP.
The MPC also provided an outlook on inflation, noting the possibility of average inflation falling below the earlier forecast range of 11.5 – 13.5% for FY25, contingent on achieving targeted fiscal consolidation and timely realization of planned external inflows.
