The State Bank of Pakistan (SBP) has announced a 1% reduction in the interest rate, bringing it down from 20.5% to 19.5%.
This decision was made during a meeting of the Monetary Policy Committee (MPC) held on Monday, as revealed by the governor of the State Bank, Jameel Ahmed. The reduction comes in response to the continuously decreasing inflation rate, according to the SBP's latest assessment.
Governor Ahmed said the interest rates and economic indicators will be reviewed again in September. He said the domestic foreign exchange reserves were stable, and the foreign exchange reserves were improving despite external payments.
Addressing the press conference, he said that inflation has been continuously reducing, as last month's inflation was 12.6%, while the same rate was 38% in May 2023. Last month, he said, the inflation rate came down to 12.6%, adding that in the previous press conference, the Bank had forecast inflation to be between 23 and 25%, and as per expectations, it averaged at 23.4%.
He said the Monetary Policy Committee meeting looked at the current account and other factors as well and decided to cut the policy rate by 100 basis points, bringing the policy rate down from 20.5% to 19.5%.
He further said that on the one hand inflation is decreasing, and on the other, the current account deficit has also come down considerably. It was $17.5 billion in 2022, which was reduced to $3.3 billion in 2023, and this year the figure is only $7 million dollars, which accounts for 0.2% of GDP. The current account deficit was 1% of the GDP last year and 4.7% in 2022.
Moreover, the SBP governor said, there has been an improvement in the Bank's reserves also, adding that from $4.4 billion in June last year, they have gone up to $9.4 billion.
He further elaborated that restrictions on imports have been lifted and foreign exchange payments are also being made. The external account has improved a lot too, which was all considered while deciding to reduce the monetary policy by 1%.
He said that the average rate of inflation in the current financial year is likely to be 11.5 to 13.5%, the estimated GDP growth in the next financial year is likely to be 2.5 to 3.5%. Banks have resolved the issues related to the profits of foreign investors, as foreign investors lost $2.2 billion from Pakistan.
The move is aimed at stimulating economic activity by making borrowing more affordable for businesses and consumers. The Governor of the State Bank emphasized that the central bank remains vigilant and is committed to taking necessary measures to maintain economic stability and support growth.
Anticipation was high as analysts had predicted a possible reduction in the interest rate, expected to be between one and 1.5%. This potential cut aimed to stimulate economic growth and ease the financial burden on businesses and consumers amid challenging economic conditions.
The MPC meeting assesses the current economic landscape, inflation rates, and other key economic indicators before reaching its decision. Following the meeting, Governor Jameel Ahmed addressed the press to detail the committee's conclusions and the resulting monetary policy adjustments.
On June 10, the State Bank Monetary Policy Committee (MPC) had reduced the policy rate by 150 bps to 20.5%, effective from June 11. The MPC noted that while the significant decline in inflation since February was broadly in line with expectations, the May outturn was better than anticipated earlier.
