The State Bank of Pakistan (SBP) on Monday announced a reduction in its policy rate by 250 basis points, bringing it down to 15 percent from the previous 17.5 percent.
This decision, made in response to calls for a significant rate cut, was finalized during a Monetary Policy Committee (MPC) meeting chaired by SBP Governor Jameel Ahmad.
The SBP's statement explained that the MPC decided to lower the policy rate by 250 basis points, effective November 5, 2024, after noting that inflation had declined more rapidly than expected, nearing the medium-term target range in October.
The MPC attributed the downward trend in inflation to the effects of its previously tight monetary policy stance. It also highlighted a sharp drop in food inflation, favorable global oil prices, and the lack of anticipated adjustments in gas tariffs and PDL rates as key factors accelerating disinflation in recent months.
However, the MPC noted that while inflation could remain volatile in the near term, it is expected to stabilize within the target range.
According to the statistics bureau, average consumer price index inflation in the South Asian country stands at 8.7% in the current financial year, which began in July. Meanwhile, the International Monetary Fund (IMF) projects an inflation rate averaging 9.5% for the year ending in June.
The economy has started to recover gradually, and inflation has dropped significantly from a multi-decade peak of nearly 40% in May 2023. However, analysts believe additional rate cuts are necessary to support further economic growth.
Inflation for October reached 7.2%, slightly exceeding the government’s target range of 6% to 7%. The finance ministry anticipates inflation will decline further, reaching between 5.5% and 6.5% in November.
Nevertheless, inflation could rise again in 2025, driven by potential increases in electricity and gas prices following a new $7-billion IMF bailout, as well as taxes on the retail, wholesale, and agricultural sectors outlined in the June budget, set to take effect in January 2025, some analysts suggest.
The central bank has gradually lowered the benchmark policy rate, which has dropped to 17.5% from a record high of 22% over three consecutive policy meetings since June, with the most recent reduction of 200 basis points occurring in September. The Monetary Policy Committee (MPC) noted that while near-term inflation may remain volatile due to various risk factors, it is expected to stabilize within the target range over time.
