Pakistan's central bank cuts key rate by bigger than expected 200 bps

Pakistan’s central bank cut its key policy rate by a bigger than expected 200 basis points to 17.5 per cent on Thursday, the third straight reduction since June as the country looks to spur growth as inflation eases.

Most respondents in a Reuters poll had expected the bank’s Monetary Policy Committee (MPC) to cut rates by 150 basis points after inflation fell to single digits in August for the first time in nearly three years.

“The pace of this disinflation has somewhat exceeded the Committee’s earlier expectations,” the State Bank of Pakistan said in a monetary policy statement, attributing this to a delay in the implementation of planned increases in energy prices and falling global oil and food prices.

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 per cent — set in June 2023 and left unchanged for a year.

Pakistan’s annual consumer price inflation rate slowed to 9.6 per cent in August from a multi-decade high of nearly 40 per cent in May 2023.

“The MPC assessed the real interest rate to still be adequately positive to bring inflation down to the medium-term target of 5–7 per cent and help ensure macroeconomic stability,” the bank said in its statement.

“This would be essential to achieve sustainable economic growth over the medium term,” it said.

The bank said there was a possibility that average inflation for the fiscal year ending mid-2025 would fall below the previous forecast range of 11.5–13.5 per cent.

He added that he expected Pakistan’s foreign exchange reserves to increase above $12 billion by March, up from $9.5 billion currently, as inflows would increase after the IMF approved Pakistan’s programme.