Karachi: In a significant move aimed at stimulating economic growth, Pakistan’s central bank slashed its key policy rate by 200 basis points, bringing it down from 19.5 percent to 17.5 percent. The decision, announced by the State Bank of Pakistan (SBP) on Thursday, follows growing demands for a substantial reduction in borrowing costs.
The Monetary Policy Committee (MPC) of the central bank made the decision during its meeting, noting that it considered various factors influencing inflation before settling on the 200 bps cut. The inflation rate in August stood at 9.6 percent, leaving Pakistan with a positive real interest rate of 10 percent.
While financial analysts had anticipated a reduction of around 150 bps, the central bank’s more aggressive cut was closer to the calls of industry leaders, who had been pushing for a 500 bps reduction to jump-start the economy. The MPC emphasised that the real interest rate remains sufficiently positive to meet its medium-term inflation target of 5-7 percent, while maintaining macroeconomic stability.
The committee pointed out several factors that contributed to the decision, including a sharp decline in global oil prices and the SBP’s foreign reserves, which stood at USD 9.5 billion as of September 6, despite weak financial inflows and continued debt repayments. Additionally, secondary market yields of government securities have dropped since the last MPC meeting, signalling improved market conditions.
Throughout FY24, the central bank had kept interest rates as high as 22 percent. However, in recent months, it introduced two consecutive rate cuts — first by 150 bps, then by 100 bps — resulting in a total reduction of 2.5 percentage points.
The reduction comes at a time when the government is looking to fulfill the conditions of its recent USD 7 billion loan from the International Monetary Fund (IMF). Officials have expressed confidence that this will be the last time Pakistan seeks IMF assistance, provided all required measures are implemented in time.
For FY25, the projected growth rate is 3.5 percent, an improvement from the 2.4 percent growth recorded in FY24. Experts believe that by reducing borrowing costs, the central bank will help spur private sector investment, boost economic activity, and create jobs, especially for the country's younger population seeking employment opportunities abroad.
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