The State Bank of Pakistan declared 100 basis point (bps) cut in its key policy rate on Jan 27, reducing it from 13% to 12%. This decision came amid increasing demands for a significant rate reduction. Since June 2024, the central bank has slashed the interest rate by a total of 1,000bps over six intervals, bringing it to its current level of 12%.
Reasons Behind the Decision
SBP Governor Jameel Ahmed attended a press conference and stated that the Monetary Policy Committee (MPC) made this decision after making evaluations regarding the inflation outlook and recent economic developments. While inflation has been trending downward, core inflation remains elevated. The governor noted positive trends in remittances and exports, which are contributing for stabilizing the current account. He expressed optimism about achieving the central bank’s foreign exchange reserve target of $13 billion by June.
After some time, the statement of State bank assured that inflation rate has got down to 4.1% year-on-year in December 2024, aided by moderate domestic demand and supply-side improvements. And it is also stated that the inflation rate is likely to go down at the end of January, it may rise slightly in the coming months.
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Economic Indicators and Concerns
The MPC noted mixed signals in economic activity:
1. GDP Growth: Real GDP growth fell below expectations.
2. Current Account: Although it showed a surplus in December, foreign exchange reserves declined due to low financial inflows and high debt repayments.
3. Tax Revenues: Despite some improvement in December, they remain below target.
4. Oil Prices: Volatility in global oil prices continues to pose risks.
BY considering these factors, the Committee made a decision for a cautious monetary policy stance to ensure price stability.
Impact on Treasury Bills
The government also minimized cut-off yields on treasury bills during last week’s auction, signaling further rate cuts. For example, the return on 12-month T-bills was reduced by 41bps, bringing the total reduction this month to 90bps.
Expert Predictions
Most financial experts had anticipated the SBP’s 100bps rate cut, aligning with broader efforts to balance economic growth, inflation control, and financial stability.
In summary, the SBP’s decision reflects a cautious optimism about Pakistan’s economic trajectory, addressing inflation trends while managing risks like fluctuating oil prices, financial inflows, and debt repayments.