The State Bank of Pakistan (SBP) announced on Thursday a reduction in the interest rate by 200 basis points, bringing it down to 17.5 percent, effective September 13, 2024. The decision was revealed in an official press release following a meeting of the bank’s Monetary Policy Committee (MPC).

This rate cut surpasses market expectations and marks the third consecutive decrease in the policy rate, as well as the second reduction in the current fiscal year. The SBP cited inflation as a key factor influencing the decision, aiming to alleviate the financial burden of the key lending rate.

In the Monetary Policy Statement, SBP said both headline and core inflation fell sharply over the past
two months. The pace of this disinflation has somewhat exceeded the committee’s earlier expectations,
mainly due to the delay in the implementation of planned increases in administered energy prices and
favorable movement in global oil and food prices.

At the same time, the committee acknowledged the inherent uncertainty related to these developments, which warranted a cautious monetary policy stance. In this regard, the committee underscored the importance of the tight monetary policy stance in driving the sustained decline in inflation over the past year.

The MPC noted the following key developments since its last meeting that have implications for the macroeconomic outlook. First, global oil prices have fallen sharply, though they remain volatile. Second, SBP’s FX reserves are around $9.5 billion as of September 6, despite weak official FX inflows and continued debt repayments.

Third, secondary market yields of government securities have declined noticeably since the last MPC meeting. Fourth, inflation expectations and confidence of businesses have improved in the latest pulse surveys, while those of consumers have worsened slightly. Lastly, the FBR tax collection during July-August 2024 was lower than the target.

Taking into account these developments as well as the potential risks to the inflation outlook and today’s decision, the MPC assessed the real interest rate to still be adequately positive to bring inflation down to the medium-term target of 5–7 percent and help ensure macroeconomic stability. This would be essential to achieve sustainable economic growth over the medium term.