SBP slashes policy rate to 13%

The State Bank of Pakistan (SBP) announced on Monday a decision to reduce its key policy rate by 200 basis points (bps), bringing it down from 15 percent to 13 percent, in response to calls for a significant rate cut.

This move follows a significant drop in inflation and calls from businesses for lower interest rates to stimulate economic growth. In November, the Consumer Price Index (CPI)-based inflation fell sharply to 4.9 percent, the lowest in 78 months. 

This created a real interest rate of 10 percent when the policy rate stood at 15 percent. Despite ample room for further cuts, the SBP chose a gradual approach, avoiding a drastic shift to single-digit rates as requested by the trade and industry sectors. While businesses advocated for a 400 to 500 basis points reduction, experts had forecasted a smaller cut of 200 to 300 basis points.

The Pakistan Stock Exchange (PSX) reacted positively to the announcement, with the benchmark KSE-100 index surging by 1867 points to close at 116169. Since June, the central bank has lowered the policy rate from a peak of 22 percent to 15 percent in four steps. 

However, the sharp decline in inflation has outpaced these rate adjustments, highlighting weak economic activity. The country’s economic growth is projected to remain between 2.5 and 3 percent in FY25, raising concerns over a slow recovery.

Looking ahead, inflation is expected to decline further, potentially reaching as low as 3.5 percent in December. However, financial analysts caution against overly rapid rate reductions as these could destabilize the banking sector and risk reigniting inflation. The finance minister has indicated that future rate cuts are unlikely to exceed 300 basis points, signaling a balanced and cautious strategy.