It seems that the State Bank of Pakistan (SBP) has decided the inflationary spiral that has had a grip on the country over the past few years is seeing a dip. The central bank’s Monetary Policy Committee (MPC) on Monday pulled the lever on the policy rate again, bringing it down to 19.5% from 20.5%.
This is not the first reduction in the policy rate, with the SBP lowering it over the past few months from 22% where it had been steady for nearly a year in which inflation and pressure from the IMF resulted in the SBP holding the rate.
The previously aggressive monetary stance of the SBP has been influenced, at least in part, by the conditions set by the International Monetary Fund (IMF). These conditions require the implementation of an appropriately tight monetary policy, aimed at curbing the price riding levels.
But the recent approval of a major IMF deal has given the central bank more breathing room, and the rate cuts have been a while in the making. As things stand, the current account deficit has narrowed in the fiscal year 2024 and SBP’s FX reserves have improved significantly from $4.4 billion at end-June 2023 to above $9 billion.
Meanwhile, headline inflation rose to 12.6pc year-on-year in June 2024 from 11.8pc in May, driven by higher electricity tariffs and Eid-related price increases. However, more inflation had steadied around 14% over the past two months, highlighting that the inflationary impact of the new budget is largely in line with expectations.
All of this means that the SBP is on the correct path by cutting the policy rate. In fact, one might argue that they took more time than necessary to start cutting the rate. The central bank would do well to temper its influences now that it is on a path of reducing the policy rate.
