The State Bank of Pakistan (SBP) has reduced its benchmark interest rate by 100 basis points to 12%, marking a significant shift in monetary policy. This decision comes as inflation shows signs of easing, providing room for economic growth.
Highlights of the Monetary Policy Decision
- Interest Rate Cut: Reduced by 100 basis points to 12%.
- Inflation Forecast: Expected to average between 5.5%-7.5% for the fiscal year.
- GDP Growth Outlook: Maintained at 2.5%-3.5% for FY 2024.
- Improved Current Account Balance: Surplus of $0.6 billion in December 2024.
- Foreign Exchange Reserves: Forecast to exceed $13 billion by June 2025.
Why Was the Interest Rate Cut?
The SBP’s decision to lower the rate follows a series of aggressive rate cuts over the past six months. Rates have dropped from an all-time high of 22% in June 2023, a move aimed at stabilizing the economy after inflation peaked at nearly 40%.
Key reasons behind the rate cut:
- Easing Inflation: December’s consumer inflation rate fell to 4.1%, the lowest in six years.
- Growth Recovery: Lower borrowing costs aim to support economic activity.
- Favorable Base Effects: Reduced year-on-year comparisons due to previous inflation spikes.
Monetary Policy Goals
The central bank’s monetary policy committee emphasized maintaining a cautious stance to ensure price stability while fostering economic growth.
“The SBP emphasized that the real policy rate must remain sufficiently positive on a forward-looking basis to stabilize inflation within the target range of 5-7%.”
Economic Indicators to Watch
1. Inflation
- Core inflation remains elevated, despite easing consumer prices.
- Maintaining the inflation target is crucial for long-term economic stability.
2. GDP Growth
- The SBP projects growth between 2.5%-3.5% for the fiscal year.
- Improved growth prospects could help restore investor confidence.
3. Current Account Balance
- Pakistan recorded a $1.2 billion cumulative surplus in H1 FY 2024.
- Strong financial inflows and a favorable trade balance have boosted reserves.
Impact on the Economy
The interest rate cut is expected to:
- Lower borrowing costs for businesses and consumers.
- Spur economic growth in key sectors.
- Strengthen foreign exchange reserves through improved exports and inflows.
However, the SBP warned of evolving risks and stressed the importance of maintaining a cautious monetary policy to avoid excessive inflationary pressures.
Looking Ahead
- IMF Review in March: The International Monetary Fund will conduct its first review of Pakistan’s $7 billion loan program, which will be critical for sustaining financial stability.
- Reserves Target: The SBP aims to exceed $13 billion in reserves by June 2025, signaling a focus on strengthening the country’s external position.
Source reuters.com
