SBP slash interest rate by 200 bps to 17.5 bp

In an aggressive move, the central bank cut its key policy rate (interest) by a bigger than expected 200 basis points to 17.5% on Thursday – the third straight reduction since June.

The move is expected to help ramp up economic activities, with the government seeking to stimulate growth amid easing inflation.

The faster pace of “disinflation” during the past two months due to a delay in the implementation of planned increases in energy prices and falling global oil and food prices provided a big room to the State Bank of Pakistan (SBP) to make largest cut of 200 basis points on Thursday.

People were expecting the bank to cut rates by 150 basis points after inflation fell to single digits in August for the first time in nearly three years.

Thursday’s move follows cuts of 150 basis points in June and 100 basis points in July that have taken the rate down from an all-time high of 22% – set in June 2023 and left unchanged for a year.

Despite the third consecutive monetary easing in the past three months, yet the central bank said it is maintaining a “tight monetary policy”. It is still running a larger real interest rate at 7.5-8% through keeping a large gap between the current key policy rate and the latest CPI inflation rate.

The annual consumer price inflation rate slowed to 9.6% in August from a multi-decade high of nearly 40% in May 2023.

This helps the bank to offset any unforeseen inflationary pressure, as it projected the growth to ascent to the upper limit of its projection in the range of 2.5% to 3.5% during the current fiscal year.

In Thursday’s meeting, the bank’s Monetary Policy Committee (MPC) announced the rate cut would come into effect from Friday (September 13).

The committee viewed the possibility of FY25 average inflation falling below the earlier forecast range of 11.5–13.5%.