Monetary Policy rate: SBP slashes key interest by 150bps, breaking months-long status quo

SBP brings down key interest rate to 20.5% in the wake of declining inflation readings
An undated image of the State Bank of Pakistan (SBP) building. — AFP
An undated image of the State Bank of Pakistan (SBP) building. — AFP

In line with the market expectations, the State Bank of Pakistan (SBP) on Monday for the first time in four years cut the benchmark interest rate by 150 basis points to 20.5% in the wake of low inflation ratings.

It should be noted that despite seven Monetary Policy Committee (MPC) meetings, the central bank had maintained a record-high policy rate of 22% for the past 11 months.

The recent policy rate announcement comes on the heels of the annual budget, while putting a halt to the prolonged standstill engulfed around it for over seven months.

After thoroughly assessing the current economic developments in the country, the central bank’s MPC underscored “better than anticipated” decline in inflation in May, stated an official statement release by the SBP.

Moreover, while reflecting on the decision, the MPC said that “underlying inflationary pressures are also subsiding amidst tight monetary policy stance, supported by fiscal consolidation.”

Additionally, the committee also pointed towards some upside risks to the near-term inflation outlook associated with the upcoming budgetary measures and uncertainty regarding future energy price adjustments.

As far as the key progress is concerned, the committee claimed that real GDP growth was seen moderate at 2.4% with subdued recovery in industry and services partially offsetting the strong growth in agriculture.

Despite massive repayments owed by the national treasure and slowed official inflows, MPC was of the view that the downtick in the current account deficit aided in propelling the foreign exchange reserves to nearly $9 billion.

Similarly, the official document issued by the SBP stated that “the real interest rate still remains significantly positive, which is important to continue guiding inflation to the medium-term target of 5-7%”.

In a recent survey conducted by the Topline Securities, almost 90% of participants expected a reduction in policy rate. However, they held different opinions pertaining to the extent of the drop, with estimates hovering between 100 bps and 300 bps.

Interestingly, economic wizards said that the SBP would again mull over the decision even after having a margin for a considerable downturn in policy rate owing to the huge difference between the consumer inflation of 11.8% and the previous policy rate of 22%.