Pakistan Cuts Benchmark Interest Rate for Fifth Consecutive Time
In a move aimed at balancing economic growth with inflation control, the State Bank of Pakistan has reduced its benchmark interest rate by 200 basis points to 13%, marking the fifth consecutive cut in five months. The decision, anticipated by all 41 economists surveyed by Bloomberg, comes amidst signs of economic recovery and easing inflation.
The State Bank of Pakistan's (SBP) decision to lower the key policy rate follows a decline in food inflation and the removal of the gas tariff hike introduced last year. Although businesses had demanded a sharper reduction of 400-500 basis points, the central bank opted for a more measured approach, citing stubborn core inflation at 9.7% and the volatility in inflation expectations. The 200-basis-point cut brings the rate down to 13%, effective from December 17, and reflects the economy's improving conditions, including a $7 billion loan from the International Monetary Fund and higher remittances that have boosted foreign exchange reserves to $12.05 billion – the highest level since March 2022.
Analysts predict that the easing inflation, which hit a six-year low in November, may decline further, potentially opening the door for additional rate cuts. The central bank is expected to remain vigilant, considering multiple risks that could reignite inflationary pressures. These include the government's potential to impose inflationary taxation measures due to a Rs356bn revenue gap, a risk of food inflation resurgence, and the likelihood of a global commodity price hike. The high base effect driving the recent sharp decline in Consumer Price Index (CPI) inflation will also result in an upward trajectory unless structural reforms are implemented.
The State Bank of Pakistan's decision to cut interest rates is seen as a positive step in supporting the economic recovery. However, without addressing the underlying structural issues, rapid growth may exacerbate economic and financial crises. The central bank's move will be closely watched as it navigates the delicate balance of stimulating growth and controlling inflation.
