SBP Lowers Key Policy Rate by 200 Basis Points to 17.5%

The State Bank of Pakistan (SBP) has announced a significant reduction in its key policy rate, cutting it by 200 basis points (bps) to 17.5%, down from 19.5%. This decision was made in response to increasing calls for a rate cut and will be effective from September 13, 2024.

Decision by the Monetary Policy Committee (MPC)

The SBP’s Monetary Policy Committee (MPC) issued a statement following its meeting, explaining that the reduction in the policy rate was based on several factors affecting the inflation outlook. The committee noted that the real interest rate remains sufficiently positive to achieve its medium-term inflation target of 5% to 7% while maintaining macroeconomic stability.

Factors Influencing the Decision

The MPC cited three key factors behind its decision:

Global Oil Price Decline: The sharp drop in global oil prices has eased inflationary pressures, providing a more favorable environment for a rate cut.
Stable Foreign Reserves: Despite sluggish inflows and ongoing debt repayments, the SBP’s foreign reserves stood at $9.5 billion as of September 6, 2024. This stability supports the central bank’s decision to lower the policy rate.
Declining Yields on Government Securities: The secondary market yields for government securities have significantly decreased since the last MPC meeting, reflecting improved investor sentiment.

Mixed Sentiment in Surveys

While the SBP reported that business confidence and inflation expectations have improved based on recent surveys, consumer sentiment has worsened slightly. This mixed sentiment reflects the ongoing challenges in balancing economic stability with public expectations in the face of inflationary pressures.

The SBP’s decision to lower the key policy rate to 17.5% aims to curb inflation while promoting macroeconomic stability. As Pakistan continues to navigate global economic shifts, including fluctuating oil prices and foreign inflows, the rate cut is expected to provide relief to businesses and the broader economy, though challenges remain on the consumer front.