KARACHI: The State Bank of Pakistan (SBP) cut its key interest rate by 150 basis points on Monday in a widely expected move, marking its first rate reduction in nearly four years in its effort to boost growth amid a sharp decline in retail inflation.
The decision to cut the key rate to 20.5% comes two days ahead of budget and a week after data showed inflation slowed to a 30-month low of 11.8% in May.
However, the Monetary Policy Committee (MPC) foresees a risk of inflation to rise significantly in July 2024 from current levels, before trending down gradually during FY25.
The MPC in its statement 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 Committee assessed that underlying inflationary pressures are also subsiding amidst a 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.
As per the survey conducted by Topline Research, 43% of participants expected the policy rate to decline by 100bps.
Similarly, in a poll conducted by CFA Society Pakistan, 48% expected the policy rate to decrease by up to 100bps.
According to a Bloomberg survey, 63% of the participants expected a 100bps decline in the key rate.
