Pakistan’s central bank cuts policy rate by 1.5 percent to boost economy

KARACHI: Pakistan’s central bank on Monday cut its key interest rate by 150 basis points, or 1.5 percent, after keeping it at an all-time high of 22 percent since June last year, in a much-expected move that marks the country’s first rate cut in four years.
The decision to slash the policy rate to 20.5 percent comes after data showed inflation had eased to a 30-month low of 11.8 percent in May.
The rate cut is more than the expectation gauged through surveys conducted by various financial institutions that predicted about 100bps reduction. 
“Monetary Policy Committee (MPC) noted that while the significant decline in inflation since February was broadly in line with expectations, the May outturn was better than anticipated earlier,” the State Bank of Pakistan (SBP) said in a statement.
The committee assessed that underlying inflationary pressures were also subsiding amidst tight monetary policy stance, supported by fiscal consolidation. 
At the same time, the MPC viewed some upside risks to the near-term inflation outlook associated with the upcoming budgetary measures and uncertainty regarding future energy price adjustments. 
“Notwithstanding these risks and today’s decision, the Committee noted that the cumulative impact of the earlier monetary tightening is expected to keep inflationary pressures in check,” the statement read.
Pakistan’s central bank had raised its policy rates in an emergency meeting in late June last year to a record high of 22 percent. Monday’s move is the first rate cut since Jun 25, 2020.
While financial analysts called it a bold move, industrialists said it was “too little, too late.” 
“A rate cut of 1.5 percent was a bold decision by the State Bank of Pakistan, especially before the finalization of the new IMF (International Monetary Fund) Program and the announcement of Budget FY25,” said Khurram Schehzad, CEO of Alpha Beta Core financial advisory firm. 
The South Asian country is set to unveil budget for the next fiscal year in a parliamentary sitting on June 12. 
Islamabad is currently locked in talks with the IMF for a longer-term bailout of around $8 billion and the country is expected to formally request for the program after the budget.
However, Atif Ikram Sheikh, president of the Federation of Pakistan Chambers of Commerce & Industry (FPCCI), said the business community was expecting higher and more substantive rate cuts. 
“The policy rate cut announced today is too little, too late. The business, industry and trade community was expecting higher and more substantive cut after inflation dropped to 11.8 percent which is lowest in 30 months,” Sheikh said.
The FPCCI president said the interest rate should come down to 15 percent to enable Pakistani exporters compete in regional and international export markets by reducing the cost of capital. This should be accompanied with the fulfillment of the government’s promise to rationalize electricity tariff for the industry, he added. 
Iftikhar Ahmed Sheikh, president of Karachi Chamber of Commerce & Industry (KCCI), expressed his disappointment over what he called a meager rate cut, saying the business community was expecting a substantial reduction of at least 4-5 percent.
“However, as the SBP has decided to ease monetary policy by 150 basis points, we hope that this approach continues in the days to come to gradually bring down the interest rate to single digit,” he said in a statement. 
He said lower interest rate in line with international trends would certainly encourage borrowings by the private sector that would prove favorable for the economy, encouraging business expansion as well as industrialization.
The KCCI president called the rate cut “first step in the right direction” and hoped to see further reduction in interest rate in a country where the cost of doing business had been exorbitantly high.