TLDR:
SBP cuts policy rate to 13%
Inflation declines but growth remains slow
Stock market rallies amid rate adjustments
KARACHI (The Thursday Times) — The State Bank of Pakistan has announced a major policy rate cut of 200 basis points, bringing it down to 13 per cent. The move aims to address the decline in inflation and boost economic activity while navigating cautious expectations from financial experts and market stakeholders.
Monetary policy shift amidst inflation trends
The decision by the State Bank comes as inflation indicators show a significant decline, with the Consumer Price Index reaching a 78-month low. The central bank attributed the rate cut to easing food inflation and the gradual fade-out of the previous year’s gas tariff hike. However, core inflation remains persistent, reflecting underlying economic volatility and consumer uncertainty.
The Monetary Policy Committee (MPC) acknowledged that inflation is expected to stabilise in the medium term. For now, the central bank is focused on balancing inflation control with the need to stimulate growth in a challenging economic environment.
Improved growth indicators and external surplus
Amid the declining inflationary pressures, the economy has shown signs of marginal recovery. High-frequency indicators point to an uptick in economic activity, reflecting an improvement in business confidence. Additionally, the current account has posted a surplus for three consecutive months, bolstering foreign exchange reserves to around $12 billion.
The central bank highlighted that global commodity prices have remained favourable, easing pressures on the import bill. This environment has enabled Pakistan to sustain external stability despite weak financial inflows and significant debt repayments.
Private sector lending on the rise
Another key factor behind the rate adjustment is the noticeable increase in private sector credit. Improved liquidity and eased financial conditions have encouraged banks to meet advances-to-deposit ratio thresholds. This dynamic is expected to play a crucial role in reviving business activity and addressing stagnant economic growth.
The government views the rate cut as a pivotal step in enhancing investor confidence and spurring investment. The prime minister praised the central bank’s move, expressing optimism about its impact on the broader economy.
Mixed reactions from experts and stakeholders
The rate cut has drawn mixed reactions from the financial and business communities. While trade and industry sectors pushed for a steeper reduction to single digits, financial analysts cautioned against overly aggressive cuts that could destabilise the banking system. Experts also noted that the steep fall in CPI might signal subdued economic activity, particularly given modest growth forecasts for the fiscal year.
The Pakistan Stock Exchange responded positively, with the KSE-100 Index climbing significantly on anticipation of the rate adjustment. Analysts predict that further room for policy easing may emerge if inflation trends continue to decline, but caution remains about the long-term sustainability of these measures.