The State Bank of Pakistan’s Monetary Policy Committee (MPC) announced a significant reduction in its key policy rate, lowering it by 200 basis points to 17.5 percent from the previous 19.5 percent. This decision comes amid widespread calls for a substantial rate cut.
“The Monetary Policy Committee has decided to lower the policy rate by 200 basis points to 17.5 percent during today’s meeting,” the SBP stated, explaining that the decision was influenced by various factors affecting the inflation outlook.
The MPC emphasized that the real interest rate remains sufficiently positive to drive inflation down to the medium-term target of 5 to 7 percent, contributing to macroeconomic stability.
Interest rate changes have been closely monitored by economic stakeholders, with reactions ranging from cautious optimism to demands for more aggressive reductions. At present, the interest rate stands at 19.5 percent, while inflation in August reached 9.6 percent, resulting in a real interest rate of 10 percent. This disparity had fueled demands for a deeper rate cut.
Financial analysts had broadly expected a reduction of 150 basis points, with some predicting a 200bps cut. However, industry leaders had pushed for a more drastic reduction of 500bps to stimulate economic growth.
A survey conducted by Topline Securities revealed that 98 percent of participants believed the SBP would announce a rate cut. “Of those surveyed, 85 percent anticipated a cut greater than 150bps, while 15 percent expected a reduction between 50 and 100bps,” the poll noted. Topline Securities also shared its expectation of a 150bps cut, citing the 100bps reduction in the last policy meeting as a reference.
In its report, AKD Securities projected a 150bps cut, citing the high real interest rates, disinflationary trends, and sluggish economic activity.
Earlier in FY24, the SBP maintained the policy rate at a peak of 22 percent. However, it later introduced two consecutive cuts — 150bps followed by 100bps — totaling a 2.5 percentage point reduction.
Despite these rate cuts, the private sector has continued to push for further reductions, pointing to the gap between inflation and the interest rate. The government has repeatedly highlighted that the recently secured $7 billion IMF loan would be the last, assuming all IMF conditions are met.
Financial experts have suggested that the Finance Ministry’s statements indicate the upcoming rate cut would be conservative, likely not exceeding 200bps, as the central bank aims to maintain a buffer against inflation.
Earlier in the year, inflation had surged to 38 percent despite multiple interest rate hikes. However, a significant drop in inflation over the last three months has created an opening for the government to inject liquidity into the private sector, potentially boosting economic growth.
For FY25, the projected growth rate is set at 3.5 percent, up from the 2.4 percent recorded in FY24. Experts believe that lowering borrowing costs will incentivize private sector investment, stimulate economic activity, and create much-needed jobs, especially for young Pakistanis seeking employment abroad.
