SBP goes for major policy rate reduction

The decision to cut rate by 200bpc will facilitate establishing and running businesses

IN a move welcomed by businessmen, industrialists and economic experts, the State Bank of Pakistan (SBP) has cut its key policy rate by 200bps, to 17.5 per cent from 19.5 per cent, following calls for a decisive rate reduction.

“The Monetary Policy Committee (MPC) decided to decrease the policy rate by 200bps to 17.5 per cent in today’s meeting,” a statement issued by the SBP said, adding that it took “account of various factors impacting the inflation outlook”.

In fact, the statement said, the MPC “assessed the real interest rate to still be adequately positive to bring inflation down to the medium-term target” of 5 to 7 per cent and help preserve macroeconomic stability.

“Third, yields on government securities in the secondary market have declined appreciably since the last MPC meeting,” the report said. It also said: “Inflation expectations and confidence of businesses have improved in the latest pulse surveys while that of consumers has worsened slightly.”

Previously, the interest rate stood at 19.5 per cent while the inflation for August stood at 9.6 per cent, translating into a positive real interest rate of 10 per cent. This difference had prompted requests for a significant rate drop.

On the inflation forecast, the committee said this August decline “reflected the influence of restrained demand, reinforced by improved supplies of major food items”.

Financial analysts had forecast a reduction of 150 basis points, although some had expectations of a cut of 200bps. Yet the urge for accelerating economic development made the industrialists request a more dramatic reduction of 500bps.

According to a poll conducted by Topline Securities, 98 per cent of the respondents believed the SBP would cut interest rates.

Some analysts said on Thursday the latest cut in policy rate would greatly facilitate setting up and running businesses in the country. The policy rate reduction, coming on the back of a cut in inflation, suggests that the economy is indeed improving, they added.

The SBP had kept interest rate at 22 per cent during the entire fiscal year of FY24.